Let’s face the facts: if you are interested in investing your hard earned money, there will be a vast amount of options at your disposal. As you do your research, you will read all sorts of sales pitches and promises which will paint a picture in your mind. Just follow this company, investment guru, financial “expert”, etc., then you will eventually grow rich with no financial stress.
INVESTING STATISTICS BASED ON REALITY
One good thing about investing is that past results can be studied and analyzed. The overall consensus is that asset allocation, market timing and fund managers (the so-called experts) DO NOT BEAT the market indexes over time. That makes the chances of an individual investor beating the market a daunting task.
WHAT SHOULD I DO WITH MY MONEY?
It is more likely a waste of time to try to beat the market yourself or pay fees to the “professionals” to manage your investments. But just because that is true, certain investing principles stand to be true over time.
Asset allocation is important as well as diversification of your investment portfolio. This is due to the fact that you should not keep all or most of your eggs in one basket. Prices rise and fall in every market and no one knows what the future will bring. That said, individual risk tolerance plays a big factor in how an investor should allocate his portfolio.
WHAT SHOULD BE MY STRATEGY RIGHT NOW?
The first step is to determine your asset allocation. You always will need cold hard cash reserves. Determine how much cash you will need. Most experts say 6-12 months living expenses as well as extra for any likely future expenses over the next 3 to 5 years.
The leftovers should be used for investment and growth. Stocks are the most volatile short-term but offer the best historical returns long term. The more time you have before you need to touch the money invested, the more percent you should keep in stocks. You can have some rough years in down markets, but in the long run, the market always recovers. The rest of your investments can be put into less risky investments and to diversify.
Finally, you must be realistic about your risk tolerance. No one will stick to a long-term investing strategy if it does not fit in with their appetite for risk. For example: a 30-year-old with 80% of their portfolio in stocks with a low appetite for risk who has had stellar returns the last 3 years suddenly sees the market tanking as we enter a recession and bear market in stocks. Would you think he will just hold on, or sell all of the stock positions due to fear? My guess is that emotion will overtake logic and that investor will not stick to the plan.
Thus your plan should be: calculate cash reserves, and determine your asset allocation based on your investment horizon and risk tolerance. Rebalance as needed and stick to your plan. Adjust it as your needs change and investment horizon shortens.
–Jacques Piccard, Managing Director at Davenport Laroche