In these tough economic times it is more important than ever to remember that, aside from your state lottery, there are no “get rich quick schemes.” There seems to be no shortage of: infomercials promising $10,000 a month for part-time home based businesses, friends approaching you about the next big network marketing thing (think Amway, LCN long distance, and Mary Kay), and investment managers and funds promising to return double digit returns, even in this bad market. Marketers of investment products are great at highlighting whichever most recently ended time period yields the best results for them. For example, their 5 year return could be 10%, but if you add just 2 years, it could drop to 8%. If their performance declines, they can add or subtract a few months or years to make their performance appear a little better.
Keep in mind that past performance is no guarantee of future results. It reminds me of when I go to Oakland Raider games, and even though they have lost more games in the last 5 years than any NFL team over any 5 year span in NFL history, they still claim to be the “winningest team in professional football.” Note that up until a few years ago it was the “winningest team in professional sports.” Anyone who follows the NFL knows this is fishy, but most people don’t follow the market closely enough to spot this kind of monkey business in investment results. We are in a global market mess. There have been 15 bear markets (i.e. bad) since 1929 and the one we are in right now is the second worst (down 58% since 2007). The worst (down 86% from 1929-1932) and the third worst (down 54% from 1937-1938) both occurred during the Great Depression.
When investing, keep in mind the old adage; if it sounds too good to be true, IT PROBABLY IS. I’ve recently come across friends touting 801(k)s (401(k)s with double returns) and funds and/or managers with guaranteed returns. If you take anything from this, please remember that there is NO GUARANTEED INVESTMENT IN THE STOCK MARKET. Anyone who says otherwise is not being truthful. Someone is taking the risk, either you or the fund and/or manager; and I can assure you that people who sell funds and investments for a living think first and foremost about limiting their risk, not necessarily yours. More modest return investments, like bonds, carry less risk, while equity investments offer higher potential returns, and in return carry more risk. No one is going to offer high returns for little or no risk. On average, the market returns 10%-12% over a 30 year period and most experts agree that is about all you can hang your hat on.
Investing is a process over time, not a calling of the top and bottom of the market. Getting in and getting out at the respective bottom and top is not an investment strategy; it is a speculative game that results in a lot of sleepless nights. Your strategy should include a disciplined plan of consistent investing in a diversified portfolio over some period of time. It is the accumulation of that principal, along with reinvested investment income and dividends that will yield accumulated wealth over the long run. The best way to ride the highs and lows of the market is to pick a portfolio of well diversified securities and periodically rebalance back to your targets. For example, a sample portfolio could include the following asset classes: (i) 30% Bonds, (ii) 25% large company stocks, (iii) 20% small company stocks, and (iv) 25% natural resources (i.e. energy, gold, silver, etc..). At any given point in time, some assets will be up, but others will be down. If your investment time horizon is long term, your portfolio should be more heavily weighted towards equity and if your horizon is shorter-term, then it should skew more towards bonds. Things you can do to manage your nest egg:
· Pick target percentages for your various asset classes and rebalance your portfolio back to your targets annually, thus forcing you to sell high and buy low.
· Invest a consistent amount monthly , bi-monthly, or quarterly.
· Diversify, diversify, and diversify.
· Don’t allow stock from your company to dominate your portfolio (think about those at Enron who lost everything when it went down).
· If you use an independent advisor, demand that they use a bank for custody and reporting services for your assets (this protects you against Ponzi schemes like Bernie Madoff’s).
