February 1—Did you know, this week will usher in the Chinese New Year – the Year of the Pig? If you believe in horoscopes, it is “a year of fortune and luck.”
Personally, I’ll take whatever good luck I can get, but I also intend to stick with a sensible investment strategy. In my last article, I discussed how discipline is critical to investment success. Today let’s look at three little investment practices for putting fickle fortune on your side.
1. Stop Trying To “Beat the Market.” Capital markets set current prices based on what market players collectively expect to happen next. The moment expectations change, so do prices, which makes it effectively impossible to consistently outguess future price-setting. Fortunately, you don’t have to. Instead of trying to outperform the market, seek exposure to available market returns while managing the risks involved. Most financial goals can be met with this approach, especially if you …
2. Use Low-Cost Asset-Allocated Funds. Sensible investing calls for dividing your investment dollars among the market’s sources of expected returns. This is called asset allocation. You’re spreading (allocating) your risks and expected returns among these assets: stocks, bonds, cash, and tangibles such as real estate and commodities. Also, while you can’t control the markets, you can control the amount you spend to participate in them. So look for low-cost funds offering this sensible approach.
3. Mind the Risks Involved in Seeking Higher Returns. How do you know which asset allocation mix is right for you? To expect higher market returns, you must be willing to accept higher market risks in the form of a more volatile ride along the way. Conversely, to enjoy a smoother investment experience, you must expect lower returns. The hierarchy of highest-to-lowest expected returns is: stocks, real estate, commodities, bonds, and cash. By diversifying your investments across and among these holdings, you can choose the amount of risk/volatility you want to accept for the returns you’d like to seek.
Once your sensible portfolio is in place, you also must give it time to grow for decades or more. So go ahead, take time to celebrate the Chinese New Year – and here’s hoping happy fortune smiles on us all.
Written by John A. Frisch, CPA/PFS, CFP®, AIF®, PPC®