Ignore market surge, be true to yourself
FOR MANY investors who have stayed away from the stock market for the past four years, this is a Hamlet moment. Returns look so tempting right now as stock indexes show their best performance since May 2008, with technology shares leading the way.
To invest or not to invest? Fortunately, you can take a Polonius approach to the market. He’s the father of Ophelia and Laertes who gets stabbed by Hamlet while spying on the vengeful prince of Denmark. Despite his bad timing, he has some great advice: “This above all: To thine own self be true.” I’m reminded of Polonius’s speech by the notorious bear money manager Jeremy Grantham, who counsels long-term patience and resilience in a recent newsletter. While Grantham is bullish on “high-quality” (dividend-paying) stocks, oil, copper, forestry and farmland, I’m not suggesting you jump into anything before you do some serious self-analysis.
How do you be true to yourself? You need to lay down a set of investment principles and goals—if you haven’t done so already. When do youwant to retire? Are you saving for college? Howmuch risk can you tolerate in the form of annual losses? Once you’ve answered these questions, write them down. This is your template for asset allocation.
Your asset allocation is like making a pie. In fact, when you’re done, it should look like a pie chart with each portion of stocks, bonds, cash and other investments graphically displayed. It won’t come out right, though, unless you’ve been honest with yourself.
A self-questionnaire will get you most of the way there. I like the retirement asset allocator at Yahoo! Finance (http://link.reuters.com/ buq86s).
Bankrate.com also has a useful tool (http://link.reuters.com/ cuq86s).
The Yahoo tool, for example, asks you about upcoming major expenditures, time horizons, income, age and investment risk profile. Since it’s geared toward behavior and not absolute numbers and market predictions, it tends to focus more on your psychology. Very few people are good at market forecasts, nor should they be.
Based on what you tell these calculators, they will give you a thumbnail asset allocation. Wait, you’re not done yet. At this point, all you have is the crust and shell of the pie and what it might look like. You need to fill it with something. You can easily create your mixwith passive, low-cost exchange-traded or mutual funds. With these prepackaged portfolios, you can take as much or as little risk as you want. Don’t forget to do some retirement-income estimates as well.
For even greater customization, you should talk with advisers such as certified financial planners, registered investment advisers or chartered financial analysts.
Even certified public accountants designated as personal financial specialists can help you craft a personalized plan.
Having invoked Polonius’s famous line, I caution you to do what he says and not what he does. Do your homework. Spell out your dreams and fears. Don’t act on impulse just because the market is surging. Invest based on the way you live, not what Wall Street tells you to do. Don’t follow your gut; look at long-term returns.
In other words, don’t stand behind a curtain waiting to hear what you want to hear and end up getting skewered. You don’t have to be a bit player in a tragedy involving your money and future.