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Investing Again: Some Things to Keep in Mind

With the Obama team back at the helm, a lot of folks are wondering if it is safe to stay in the stock market, or if it is time to bail out.  To help investors make up their mind on this subject, we are sponsoring a workshop on Saturday, March 2, at 11:00AM.  If you happen to be in the southwest Florida area on that day and would like to learn while you enjoy a delicious brunch, please call us at (239) 390-1221 to reserve your place.

 

With the economy looking less hostile by the day, a lot of former investors are dusting off their savings accounts and wondering if now is the time to get back into the market.

For those who are looking to get back in, here are a few tips to keep in mind if you are interested in prudently investing and avoiding some of the losses that may have occurred the last time you bailed out.

Slow and steady wins the race.

While the prospect of a short turnaround is always appealing, you’ll more often than not end up fighting a losing battle if your only goal for your money is to make a quick profit and get out. Over seventy years of academic data proves that market timing is not a reliable method of prudently accumulating wealth.  Instead, invest for the long term (think lifelong) for growth opportunities within the markets you plan on investing in.  While there will always be get-rich-quick opportunities, going with safer alternatives provide a much higher margin of success than high risk high reward ventures, and will likely leave you better off.

Define your investment philosophy.  Know what you believe about your money before investing it.  Are you a believer in free markets?  That is, do you believe that the market is the best determinant of the price of a stock, or do you believe that someone has a crystal ball and is better able to determine which securities are over or under priced?  Defining your investment philosophy will dictate how your portfolio should be managed.  Those who don’t believe in free markets will be most likely to utilize stock picking, market timing and track record investing.  Make sure that your management behavior is consistent with your philosophy.

For those who believe that free markets work, the formula for success is simple, but not easy.

First, you must own equities.  No other asset class has grown more wealth over time than equities.  Some portion of your portfolio should be in equities, with the balance being invested in quality short term fixed-income.

Second, diversify massively and globally.  There are fourteen equities based asset classes which have a demonstrable return premium.  In other words one is compensated for the risk one is taking.  Large US stocks (think S&P 500) is one asset class.  In addition, there are small US stocks, US value stocks, and US micro-cap stocks to name a few.  These same asset classes also exist outside the United States.  Make sure that you own all fourteen, or in other words, own the entire market.  Market returns vary by asset class and the associated risk.  As for the fixed-income portion of your portfolio, there are five unique asset classes.  Once again, make sure that you own them all.  To be properly diversified, I believe that your portfolio should contain somewhere between 12,000 and 14,000 unique stocks from forty-five countries around the world.

Third, periodically rebalance your portfolio.  That is, when the stock portion is down in value, sell enough fixed income and purchase more stock to get back to your original portfolio mix.  Conversely, when the stock portion is up in value, sell enough stock and purchase fixed-income, once again to get back to the original mix.  This technique enables you to capitalize on the old axiom of buying low and selling high.

Finally, work with an investor coach.  As I mentioned the formula for success is simple, but it is not easy.  The reason it is not easy is our own humanity.  You see, we are driven by human emotions.  In this case, those emotions are fear and greed.  When the market falls in value, typically our human emotion of fear prevents us from buying more stock.  When the market is soaring, greed prevents us from capturing profits and properly re-allocating to fixed income.  Working with a coach who shares your investment philosophy can help you manage your emotions and stay the course your head knows is the right path.

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