Here Are Three Simple Secrets to Investment Success

Jane M. Young, CFP, EA

Build a Portfolio to Support Your Investment Timeframe

Investment timeframe is a major consideration in developing an investment portfolio.  Start with an emergency fund covering about four months of expenses in a cash account with immediate access.  Next, put aside money that is needed over the next few years into fixed income vehicles such as CDs, bonds or bond funds.  Invest long term money into a combination of “stock based” mutual funds and fixed income investments based on your tolerance for investment risk and volatility.  Historically, stock has significantly out-performed fixed income investments but can be volatile during shorter timeframes.  Stock is a long term investment; avoid putting money needed within the next five years in the stock market.

Diversify, Diversify, Diversify

Once your emergency fund is established and funds have been put away for short term needs, it’s time to create a well-diversified investment portfolio.   We cannot predict the next hot asset class but we can create a portfolio that will capitalize on asset categories that are doing well and buffer you from holding too much in asset categories that are lagging.  Think of the pistons in a car, as the value of one asset is increasing the other may be falling.  Ideally, the goal of a well-diversified portfolio is to have assets that move in opposite directions, to reduce volatility, while following a long term upward trend.  It is advisable to diversify based on the type of asset, investment objective, company size, location and tax considerations.

Avoid Emotional Decisions and Market Timing

The best laid plans are worthless if we succumb to our emotions and overreact to short term economic news.  Forecasting the short-term movement of the stock market and trying to time the market is fruitless.   We can’t control or predict how the stock market will perform but we can establish a defensive position to deal with a variety of outcomes.  This is accomplished by maintaining a well-diversified portfolio that supports our goals and investment time horizon. 

The stock market can trigger our emotions of fear and greed.  When things are going well and stock prices are high we become exuberant and want a piece of the action.   When things are bad and stock prices are low we become discouraged and want to get out before we lose it all.  The stock market is counterintuitive, generally the best time to buy is when the market is low and we feel disillusioned and the best time to sell is when the market is riding high and we feel optimistic.  We need to fight the natural inclination to make financial decisions based on emotions.   Don’t let short term changes in current events drive your long term investment decisions.

No one knows what the future holds so focus on what you can control.  Three steps toward this goal are to create a portfolio that meets your investment time horizon, create and maintain a diversified portfolio and avoid emotional decisions and market timing.

 

 

O’Connor: Investors urged not to panic as U.S. default looms

Last Updated: July 27. 2011 1:00AM

Brian J. O’Connor

O’Connor: Investors urged not to panic as U.S. default looms

Many doubt leaders, in the end, will fail to act, trigger default

With the deadline to raise the federal debt ceiling drawing closer by the day — and the risk that the U.S. could default on its sovereign debt growing — individual financial planners are fielding lots of calls from worried investors.

A failure to raise the debt ceiling that prompts a U.S. default would cause stock and bond prices to plummet, interest rates to rise, credit for mortgages, cars and other debt to pucker up, and knock the wobbly economic recovery flat on its face. Federal Reserve Chairman Ben Bernanke himself has warned that letting the federal government run out of money would be “catastrophic.”

Nonetheless, advisers say individual investors should stick to their investment strategies for three good reasons:

First, most planners doubt that even the kinds of people who get elected to Congress these days will really allow the U.S. to default on its debt.

Second, in the case of a cataclysmic financial disaster, the traditional safe havens, such as U.S. Treasuries and even greenbacks, would take a hit.

And third, most individual investors just bungle it when they try to time when to enter and exit the stock market. “You’ve got to know when to sell but when to buy back in, too,” says Lyle Wolberg, a certified financial planner with Telemus Capital Partners in Southfield. “So you’ve got to be right twice. And that’s hard to do.”

Financial experts all agree that a U.S. debt default would be a serious, serious issue. But would it be as big as the worst global crash since the Great Depression? After all, the Dow Jones index has recovered nearly 90 percent of its record high from late 2007, at the peak of the real estate bubble. So unless you’re sure a possible U.S. default would create another great recession, it may not be worth the cost and worry to start rearranging your investments.

And even if it is, a well-structured investment portfolio already is positioned to ride out those kinds of losses.

“The diversification we’ve had in place is to address all these issues, so there really are no moves to make,” says Bill Mack, a certified financial planner who runs William Mack & Associates in Troy. “If you’re in inappropriate investments now, especially if you’re too heavy into equities, I’d be concerned. But this is a short-term event and your portfolio should be geared toward long-term objectives.”

With bonds, stocks and even U.S. Treasuries taking a hit in a default, investors really don’t have many places to run. Some analysts have suggested Swiss francs, an investment that’s well beyond the means and expertise of most folks trying to protect a 401(k) or Individual Retirement Account. Other strategies — from the popular but very risky choice of gold, to moving from long-term to short-term bonds or switching to high-dividend-yielding blue-chip stocks — are common suggestions.

But those strategies have been in place for more than year now, as investors anticipated rising interest rates, more inflation or looked for safe income to replace low-yield Treasuries.

“There isn’t a whole lot you can do that hasn’t been covered by the markets,” says Karen Norman, a certified financial planner with Norman Financial Planning in Troy. “Positioning yourself other than running for cash is tremendously difficult.”

Even cash would lose some value as the dollar would decline after a default, making it more expensive to buy imported goods, including gasoline. The advantage would be that a switch to cash now would leave an investor positioned to go bargain-hunting when stocks slide after a default. But individual investors who make regular contributions to a 401(k) or IRA already buy more shares with every deduction from their paychecks or automated payment from the checking accounts, so they’re already positioned to buy low once stocks hit the skids, just as they’ve done throughout the entire downturn.

The reason to go to cash now, says Nina Preston, a certified financial planner with the Society for Lifetime Planning in Troy, is if you need a stable stash to cover your short-term income requirements, such as retirees who are counseled to hold three to five years worth of needed income in cash or equivalents. But if you need to do that, you’re already holding too much stock.

“If you need to flee to cash,” Preston says, “you should have been in cash to start with.”

The final drawback to moving your money around — even to cash — is that you’ll probably do the wrong thing, warns Mack.

“If people are adamant about going to cash, if they feel it in their bones that the world is coming to an end, at what point do they say, ‘It’s time to get back in?'” he asks. “Don’t tell me its when you feel better because that’s too late. It just doesn’t work to follow your gut feelings.”

The bottom line is that investors need a strategy that lets them ride out short-term economic woes, even if they’re self-inflicted by our own leaders.

“We’ve looked ahead and positioned ourselves the best way we can,” Norman says. “Now we need these folks in Washington to do their duty. That’s what we’re paying them to do.”

Which means that your best investment option is a very easy one — picking up the phone and placing a call to your congressman or congresswoman.

boconnor@detnews.com

 http://detnews.com/article/20110727/OPINION03/107270346/O-Connor–Investors-urged-not-to-panic-as-U.S.-default-looms#.TjMnDLApgnQ.email

10 Tips for Financial Success

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Jane M. Young CFP, EA

1. Set Goals –
Review your personal values, develop a personal strategic plan, establish specific goals for the next three years and identify action steps for the coming year.

2. Understand Your Current Situation –
Review your actual expenses over the last year and develop a budget or a cash flow plan for the next 12 months. Compare your expenses and your income to better understand your cash flow situation. Are you’re spending habits aligned with your goals? Can or should you be saving more?

3. Have sufficient Liquidity –
Maintain an emergency fund equal to at least four months of expenses in a fully liquid account. Additionally, I recommend having a secondary emergency fund equal to another three months of expenses in semi-liquid investments. Increase your liquidity if you have above average volatility in your life due to job instability, rental properties or other risk factors.

4. Always save at least 10% of your income –
Regardless of whether you are saving to fund your emergency fund or retirement you should always pay yourself first by saving at least 10% of your income. Most of us need to be saving closer to 15% to meet our retirement needs.

5. Pay-off Credit Cards and Consumer Debt –
Learn the difference between bad debt (credit cards) and good debt (fixed-rate home mortgage). Avoid the bad debt and take advantage of the leveraging power of good debt.

6. Take Advantage of the Leveraging Power of Owning Your Home –
Once you have established an emergency fund and have paid off your bad debt start saving for a down payment to purchase your own home.

7. Fully Fund Your Retirement Accounts be a tax smart investor –
Participate in tax advantaged retirement programs for which you qualify. Maximize your Roth IRA and 401k contribution take full advantage of any company match on your 401k. If you are self-employed consider a SEP or Simple plan. Always select investment vehicles that provide the most beneficial tax solution while meeting your investment objectives.

8. Be an Investor, Not a Trader. Don’t time the market and don’t let emotions drive your investment decisions –
Investing in the stock market is a long term endeavor, forecasting the short-term movement of the stock market is fruitless. Avoid emotional reactions to headlines and short-term events. Don’t overreact to sensationalistic journalists or chase the latest investment trends. You can establish a defensive position by maintaining a well diversified portfolio custom tailored to your unique situation. Slow and steady wins the race!
“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”  -Peter Lynch, author and former mutual fund manager with Fidelity Investments

9. Don’t Invest in anything you don’t understand and be aware of high fees and penalties –
If it sounds too good to be true and you just can’t get your head around it, don’t invest in it! If you want to invest in complicated products, read the fine print. Be aware of commissions, fees and surrender charges. Be especially wary of products with a contingent deferred sales charge. There is no free lunch, if you are being promised above market returns there is probably a catch. Keep in mind that contracts are written to protect the insurance or investment company not the investor.

10. Diversify, Diversify, Diversify – rebalance annually –
It is impossible to predict fluctuations in the market or to select the next great stock. However, you can hedge your bets by maintaining a well diversified portfolio. Establish an asset allocation that is aligned with your goals, investment timeframe and risk tolerance. You should have a good mix of fixed income and equity based investments. Your equity investments should be spread over a wide variety of large, small, domestic and international companies and industries. Re-balance your portfolio on an annual basis to stay diversified and weed out any underperforming investments.

The Demise of an Investment Portfolio – Emotions and Market Timing

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Jane M. Young, CFP, EA

Forecasting the short-term movement of the stock market and trying to time the market is fruitless. As in all areas of our lives, we can’t control what life throws at us but we can establish a defensive position to best deal with a variety of outcomes. When it comes to our investments, we accomplish this through diversification, dollar cost averaging, maintaining an emergency fund and staying the course. We need to fight the natural inclination to make financial decisions based on emotions. Don’t forget that the stock market is counter-intuitive. Generally, the best time to buy is when things seem really bad and the best time to sell is when things seem the brightest. But then again, we just never know. It is easy to get caught up in the fear or euphoria of the moment. But, keep in mind that emotional reactions to the market can have a devastating impact on your portfolio. The stock market is a long- term investment and we need to avoid reacting to short-term events.

Proof of this can be seen in a Dalbar study conducted in March of 2010 for the time period of 1/1/90 – 12/31/09. During this time the average return in the equity market was 8.8% but the average return for the individual investor was only 3.2%. This discrepancy is a result of investors trying to time the market or reacting emotionally to financial news and events. Below are two quotes that sum this up very well.

“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”
-Peter Lynch, author and former mutual fund manager with Fidelity Investments

“The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it (time the market) successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently”
– John Bogle, founder of Vanguard Investments

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