By Stephen Rossi, Sr.
As I have talked with prospective clients over the past few decades, I am constantly surprised by how many accomplish a plan for their future by simple guessing. I regularly hear phrases like “I think I am OK” or “I believe I am diversified.” Not knowing – guessing. That doesn’t seem to me to be much of a plan for success. As humans, our decisions are often influenced by emotions and assumptions. Recognizing this may be a key in making better investment decisions. It was said by Benjamin Graham that the investor’s chief problem – even his or her own worst enemy – is likely to be himself or herself. I concur.
Here are a few tips on what NOT to do:
- I also see a bad habit of chasing last year’s winners and dumping last year’s losers, regularly. Not only do I see this from amateur investors; far too often I will also see it from some pros. While past performance never guarantees future results and while no investment strategy can guarantee success, if we look at history, we can see some defined patterns that should be considered. In fact, investors who constantly chase last year’s winners have historically underperformed ones who had a truly disciplined and balanced and rebalanced portfolio. The problem, as I see it, in chasing winners and dumping losers is that it relies heavily upon guessing. It is market timing on a grand scale. And it is not a good way to plan for retirement. No more than you would take your 401k or IRA and bet it all on a single turn of the roulette wheel, nor should you bet large caps are better than bonds or that gold or another precious metal is better than midcaps.
- Don’t put all your eggs in one basket. You have heard that before. Diversify. You have heard that also. But how many baskets are there and what are they? In my opinion, buying individual stocks has never been planning, it is speculation. No matter how fine the company may be, there is always a chance they will fold. We have seen huge corporations go under. WorldCom. Enron. Kmart. Sears. W T Grant. Cliquot Club. General Motors. All just to name a few.
Here are some things to do:
- First, let’s buy industries not companies. While a specific beverage manufacturer may close its doors, the beverage industry will always survive. Pick an industry…any industry. Its players come and go but the base industry survives and grows and evolves over time. Safer? Sounds like it.
- Opinions may vary on just how many categories there are but most agree there are about 18: Domestic large, mid and small cap stocks. International large, mid and small cap stocks. Domestic bonds; long, intermediate and short; International bonds: long, intermediate and short. There is also real estate and precious metals.
If we were to divide our portfolios amongst most if not all of these categories we would, at least historically, be reducing risk. As the economic world moves in cycles, when a category or two are rising to the top, others are falling towards the bottom. During the economic downturn of 2008, while the stock prices were falling, precious metals and bonds performed well. In more recent years of market recovery it has been stocks that have been the winners. But they do take turns. We don’t know if this cycle will last months or years but we do know this: winners tend to fall and losers tend to rise. Categories (sectors) tend to rotate. We can try to guess when to jump back and forth but that is just that…guessing.
But what would happen if we had multiple categories…contra categories…and what would happen if we rebalanced back to the original percentages annually? Would we not, by discipline, be forcing ourselves to remove emotion and to be forcing ourselves to be (categorically) selling during a high and buying other categories during a low? And what would happen when the cycle turned again? Would those things we bought low rise? And on and on and on?
My point here is that you have a decision. You can attempt to guess what will happen next. What to have. When to sell. When to get back in. Or you can satisfy yourself with what the average of the world of investing…all categories.
Steve Rossi, Sr. has been President and CEO of Rossi & Associates in Melbourne since 1994. Securities are offered through First Allied Securities, Inc., Member FINRA/SIPC, a Registered Broker Dealer while advisory services are provided by Rossi & Associates, A Registered Investment Advisor.