The stock market is in the midst of a 4+ year rally that has led to all-time highs for major market benchmarks. It’s a bit of a strange rally in that the percentage of U.S. households owning stocks is at historically low levels. Couple this with the raging market bulls we see on shows such as CNBC and it’s easy to see why many investors are confused as to how to precede. Here are 5 investing lessons to keep in mind as you move forward.
The potential downside risk should be a key consideration on how you allocate your portfolio. This is especially directed at those of you readers over the age of say 45 who are within sight of retirement and certainly those of you who are retired. Even in a well-diversified balanced portfolio if you haven’t rebalanced in awhile you allocation to equities might be higher than your plan exposing you to more risk than you might be comfortable with.
On the bond side it’s likely that the bond market’s best days are behind us. While not advocating that you necessarily decrease your allocation to fixed income, this might be a good time to look at reducing the duration in your bond holdings. Duration is a measure of the impact that a 1% increase (or decrease) in interest rates could have on a bond or a bond fund. For funds you can find this on the morningstar.com website and elsewhere.
As for you 20 and 30 something’s I’m not advocating that you ignore risk, but I am saying that at your stage of life growth from the amount saved and from how your investments are allocated should be foremost in your mind, especially in your retirement savings strategy.
It isn’t different this time
Prior to the 2000 market drop investors where touting tech stocks, including many companies with no real business plan or balance sheet. They said it was different this time, it wasn’t.
Prior to the most recent recession housing was the magic bullet. Real estate was the great hedge. It wasn’t.
I’m not sure what is being touted as different this time, perhaps its all of the talking suits on TV telling us that it’s OK to increase our equity exposure even in face of these market highs.
The point is to let your own good common sense and an up-to-date financial plan be your guide to a reasonable investment strategy for your situation. Ignore the hype.
The deleterious impact of investment fees and expenses has been well-documented in the press of late, and were highlighted on the PBS Frontline show The Retirement Gamble. The financial press is right.
- Index funds and ETFs can be a great choice for your portfolio, but make sure that you are buying the lowest cost index product that covers the area of the market that you are seeking to invest in.
- If you use actively managed mutual funds, make sure the added expense is justified by value added by the manager.
- As many funds offer multiple share classes try to buy the lowest cost share class available to you.
- If you work with a financial advisor understand how he or she is compensated and the true cost of your relationship with this advisor. Besides high fees you want to understand if the compensation structure subjects you to potential conflicts of interest in terms of the financial products that the advisor might suggest for you.
Inflation is your enemy
Inflation has been pretty benign in recent years but it won’t always be this way. Even a relatively tame level can erode your purchasing power pretty quickly in retirement. For example at 3% inflation your purchasing power will be cut in half within 24 years, a very likely life expectancy for a retiree today. As I often say to those at or near retirement, your biggest investing risk comes from inflation versus the risk of actually losing money from your investments.
You have to play to win
As I mentioned above the percentage of U.S. households holding stocks is at historically low levels. What this means is that many families have not participated in this stock market rally. While I am clearly not advocating that investors jump in to ensure they don’t miss any further gains, I am advocating that if you don’t have a financial plan in place get one done. You can then gauge how to allocate your investment dollars as an outgrowth of your financial plan. Jumping out of stocks when the market is at a low point as too many investors did in late 2008 and early 2009 and then jumping back in at a time like the present when it “feels good” is a recipe for fiscal disaster. This is the value of having a plan.
Please feel free to contact me with your investing and financial planning questions.
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