Is Your Portfolio Broken?
If it ain't broke, don't fix it. Is your portfolio broken?
If it ain’t broke, don’t fix it.
A lot of people I know tend to live by this maxim. I am certainly one of those people.
Recently, maybe it’s due to me getting older, I decided to go to the doctor to get some bloodwork done. No, I don’t feel sick, but I just wanted to make sure there wasn’t something lurking under the surface. I feel fine, but I wanted to be sure.
In a few weeks, I will have had blood drawn and tests run and I will find out if I am as healthy as I think (and hope!) that I am.
Most people I meet have the mentality that if it ain’t broke, don’t fix it with their investments. They don’t think anything is wrong with their portfolio until something major happens with the market. Their portfolio starts behaving in a way they did not expect or account for. Then, out of fear, they begin scrambling and making major changes to their portfolio. In the end, these changes typically result in making things worse for the investor instead of better.
Others, however, take the time to ask a professional to take a hard look at their portfolio. They want to make sure that they are truly diversified and truly in the right segments of the market. Then, when the market has a major change, they aren’t panicking and racing around because they have set reasonable expectations about their portfolio and its behavior. They are able to ride out the market, and in the end, they are better off for doing so.
Is your portfolio broken? Just like your body, if it doesn’t behave as it should during varying market conditions, then something is wrong.
If you don’t know if it’s broken or not, don’t you think it is worth it to know? It is worth it to me to check on my health. Not only do I need to be healthy for myself, but also for my wife and kids. My family depends on me being healthy and therefore it is worth it to me to get my health checked out.
The truth is, my family also depends on my investments being healthy too. All of what I want to accomplish in my life takes money, from everyday expenses to memory-making trips and giving to charity. It is worth it to me to make sure my portfolio is set up well too.
I like to help people have peace of mind with their investments. This means that they know what they are doing and why. This means they know the range of returns their portfolio could return in any given year. This means they don’t operate out of fear and panic when things get tough. They are able to sleep at night knowing that they are doing the best that they can with their money.
So, can you sleep at night? If you don’t know if your portfolio is healthy, contact me. I would love to help you move towards having peace of mind with your investments.
Successful Investors Do These Three Things
Last week, we looked at three behaviors that successful investors avoid:
Trying to pick the right stocks,
Trying to time to market,
Choosing a mutual fund manager based on his/her track record
This week, we will look at three things successful investors do. They:
Diversify
Own equities
Rebalance
Instead of trying to pick and choose the right stocks to buy, successful investors diversify as broadly as possible. The proverb “don’t put all your eggs in one basket” immediately comes to mind. Instead of owning a few large companies like Apple, GM, and Wal-Mart, successful investors buy all of the large companies.
Successful investors learn from academic research which segments of the market actually help them get the best possible return with the least amount of risk and then buy all of the stocks or bonds in each of those segments.
Second, instead of trying to time the market, successful investors know that “time in the market” is better than “timing the market.” Successful investors stay invested when the market goes up as well as when it goes down. They recognize that the up markets bring the returns and the down markets bring the opportunities to buy low.
They welcome the market fluctuations because they know that this is where wealth is created.
Lastly, instead of trying to find a mutual fund manager who can navigate the markets, they understand that no one can predict the market. Since no one can see the future, they know that setting up a broadly diversified portfolio that is customized for their own risk tolerance is best.
Successful investors know that markets fluctuate and are excited when the market moves (see above). To make the most of these fluctuations, they know they have to rebalance.
What does this mean?
The successful investor decides how much risk he is willing to take and then builds his portfolio accordingly. However, over time, the ratio of stocks to bonds changes with market fluctuations. Rebalancing is a way to get the portfolio back on target by selling what is high and buying what is low relative to the portfolio.
For example, let’s pretend you had 60% of your money in stocks and 40% in bonds. In 2008, as stocks values fell, the portfolio may have looked more like 45% stocks and 65% bonds. The portfolio is now off its target, so the successful investor would sell enough bonds to buy stocks until the target of 60% stocks and 40% bonds is back on track.
In this example, the successful investor sold bonds while they were high and bought stocks when they were low, thus following one of the rules of investing. Most people fail to do this and do the opposite. They see their stocks fall and instead of buying more, they sell and go to cash to “stop the bleeding.” They lock in their losses instead of buying more opportunity.
Successful investors automate this process so they don’t have to worry about it and know that their portfolio is one they can live with their whole life and that it will stay on course for the long haul.
If you would like your portfolio analyzed to see if you are diversified and/or have the right amount of risk for your personal preference, let’s set up a time to talk.
Three Things to Avoid to be a Successful Investor
For years, Wall Street has had no shortage of opinion on how investors should invest their money. The information is so dense, that there is a bit of a fog in the industry. This leaves investors without much (if any) clarity on exactly what to do with our money for our American Dreams.
There are three things they want us to believe in order to be a successful investor:
We can pick the right stocks.
We can learn how to time the market (i.e. get in at the bottom of a rush and to get out before things crash).
If we can’t (or don’t) want to do this, we can choose a fund manager to do it for us.
Let’s take a closer look at each of these.
First, Wall Street teaches that successful investors know how to pick and choose the right stocks and/or bonds to buy. There are investing shows on tv, called investainment, that inform investors what stocks or bonds they should buy or sell. Their belief is that you can pick and choose the right companies to invest in and maximize your return.
The bad news is that there has been study after study showing that although people try to pick the winners and losers, that they cannot do it over the long haul. And, in the attempt to do so, investors actually underperform the rest of the market.
Second, Wall Street teaches that successful investors know how to get in the market before a rush and how to get out of the market before it crashes. I remember seeing an infomercial on how to do exactly this and if I buy their “leading edge” software, that I can watch for the “markers” and know when to get in and out of the market. I can remember feeling desperate enough to make some money and a strong pull to buy this software. I didn’t end up buying it, though I think there is a reason that they air these infomercials in the wee hours of the night.
The bad news here is that although there are lots of companies trying to sell us software, the truth is that timing the market wrong is very costly. Even missing as few as 5 of the right days to jump in and out of the market over a 20 year window can create catastrophic results in your portfolio.
Third, Wall Street teaches that successful investors work with the best mutual fund managers who will choose the right stocks and time the market successfully. They point backwards to their 5-year track record, or a 10-year track record that shows that they did it and then claim that they can do it going forward.
The truth here is that the past performance of any mutual fund manager has little to no correlation to their ability to perform that well in the future. In other words, you can’t rely on their track record to give you an indication of how things could go in the future.
There’s a reason every investment has the disclaimer that past performance is no guarantee of future results. But the industry wants so badly for you ignore this warning and to believe that there is someone who could actually do it.
If you are trying to pick the right stocks, time the market, or use a manager’s track record to pick the right fund, it is possible you could be heading for an investing disaster. These are three things to avoid if you want to be a successful investor.
The biggest problem with all three of these tactics is that it requires someone to know the future in order for these to work consistently. The truth is that no one can predict the future and therefore no one can successfully tell you which stocks to pick, when to get in and out of the market, or be able to point to their track record and say that this will be indicative of the future.
Next time, we’ll take a look at three things you CAN do to become a successful investor.