3 INVESTMENT RECOMMENDATIONS FOR 2013

By in Asset Allocation, Bond, Investing

a version of this article was previously published

“Is it a classic sell signal? The answer is unequivocally, yes.” David Rosenberg, chief economist at Gluskin Sheff & Associates (Toronto)

Quoted in the January 22-24, 2011 Wall Street Journal, Intelligent Investor column by Jason Zweig. Mr. Rosenberg was referring to the rush by the retail investor to invest in stocks, now that the U.S. stock market has nearly doubled!

INVESTING IN 2013

INVESTING IN 2013

Avoid Herd Mentality when Investing

Have you heard of the tulip mania in Holland several centuries ago? What about the tech boom at the end of last century? I think you know where I’m going with this one.

The power of the crowd is overwhelming. If others are participating, then you must get in the game as well. Beanie Babies for kids in the 90’s, gotta get them. iPhone, you’re a loser without one!

In investing, if you wait until there’s lots of evidence that the stock market is going up, you missed most of the upside.

Investors are driven by emotion. Fear that their investments will fall in value and euphoria when their portfolio value increases. These emotions encourage counter productive strategies. For example, the fund manager with a winning year experiences inflows of capital, after the run up in asset prices. When stocks fall in value, frightened investors sell.

This emotion driven investment behavior causes investors to sell low and buy high; not a great way to make money.

What’s the investor to do?

There is HARD EVIDENCE that jumping in and out of the market is deleterious to your returns.

Return on  lump sum $10,000 INVESTMENT in the S & P 500 Index from

January 1, 1980-December 31, 2010

 

Beginning value of investment

Ending value of investment

Annual Rate of Return

$10,000 Remain invested the entire time $280,740 11.36%
$10,000 Miss the best 20 months during the period $45,687  5.02%

Source: GE Asset Management

If you jump in and out of the market and miss the best 20 months of the 20 year period then you lose out on a $235,053 profit.

Are you smart enough to consistently pick the best months in which to invest? Not likely.

Start Investing Now and Do Not Time the Market

Over time, only a small percent of professional money managers ever beat the returns of the unmanaged stock market indexes. And those lucky managers, who beat the market one year, are unlikely to repeat their out performance the next.

The best chance of meeting your future financial goals through investing in the stock market is this:

1. Choose several low cost index funds or ETFs in percentages appropriate for your risk tolerance.

In general, if you are younger and can tolerate some volatility, invest more in risky stock assets. For those just starting out investing, I suggest choosing two diversified stock funds such as:

  • Schwab Total Stock Market Index Fund (SWTSX) with a rock bottom expense ratio of 0.09%
  • Schwab International Index Fund (SWISX) with an expense ratio of 0.19%.

For the less risky portion of your investment portfolio, consider these investments;

  • Government I bonds are certain to protect your funds from inflation. You can buy these safe investments online at Treasury Direct in denominations as low as $50.
  • iShares Core Total US Bond Market ETF (AGG) gives exposure to the total US bond market. Invest a small amount each month. Caveat: beware of investing too much money in bond funds now since the funds value will fall when interest rates increase.

2. Invest regularly, through ups and downs. (Schwab offers low minimums to get started investing.) Put a small amount into the investment account regularly, every month, not all at once. If you invest $200 per month, when stock prices are lower your $200 will buy more shares and when prices are higher, they will buy fewer shares. This simple discipline of dollar-cost-averaging ensures that you are keeping your average share costs low.

Do not bail out of investing when share prices fall. Investing when share prices are low creates the most wealth.

3. Every year of so, adjust the percentages of each asset class to fit with your original allocation.

Go on about your life. No worries about getting in at the bottom or out at the top.

Look, I know there are some of you out there who like to research individual stocks, and if you have the time, knowledge, and patience, you may be able to boost your returns a bit (or maybe not). But realize this, the evidence is against you. If stock investing is a pleasurable activity, by all means, allocate some of your cash to individual stocks. Just make sure to diversify your holdings so one bad decline doesn’t sink your whole portfolio

Should you listen to the Investment Gurus?

No. Tune out the noise of the day to day market movements.

The smart money does not follow the crowd, as Rosenberg implied.

The future is unknowable. Just check out the predictions from 2011 to find out how accurate they were in describing 2012.

Keep your head, act reasonably, in accord with the evidence, remain diversified, and over time, you will become wealthy.

ACTION STEPS:

Get a notebook and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

  1. Think before you follow the crowd. That goes for life as well as investing.
  2. Start investing now, even if it’s just a small amount. If you have a workplace retirement fund, start there, it’s tax deferred.
  3. Keep your investing simple and stress free. Read 3 Simple Retirement Savings Tips for 2013 by Manisha Thakor of Money Zen.

What are your investing lessons plans for the coming year?

image credit; google images_nbr dot com