I read with dismay the following from an “investment professional” in yesterday’s Washington Post:
Now is not the time to drink the “buy and hold” investment strategy Kool-Aid. Be conservative, limit your risk–and sleep well knowing your investment principal is not going to continue to decline.
The comment was in response to the following hypothetical question: “If I don’t want to be in stocks right now, what should I do with my investment money?” This investment adviser went on to recommend a portfolio comprised of 80% TIPS and 20% gold. Here’s why he’s dead wrong.
We tend to be afraid of the wrong things. We’re afraid to fly, for example, even though it’s one of the safest means of transport available. Short term losses in the stock market are another fear that’s misplaced. Our real fear should be not having enough saved to live on during retirement. A portfolio of 80% TIPS and 20% gold probably won’t lose us money, but neither would a portfolio “invested” entirely in a savings account. The problem is most of us won’t have enough money at retirement if we follow this advice.
Fear of short term losses in the stock market causes many of us to do just what this investment adviser is suggesting–head for the exits. The result is that we sell in a falling market out of fear, and buy back in during a rising market. This is a recipe for significant stock market losses. It is exactly, 100% what we should never do. As they say, if “buy-and-hold” investing is good enough for Buffett, it’s good enough for me.
Your asset allocation should be well diversified and designed to meet your financial goals. It should also be tailored to your risk tolerance (or even better, your risk tolerance should be tailored to your financial goals, but I digress). If you’ve designed a solid portfolio of equities and bonds, then you should expect to lose money over certain periods of time. What is happening in the market today should not surprise or shock you. And in the long run, it makes for a better time to buy stocks. The performance of your investments depend largely on what you do during a falling market. Here’s the advice I follow during a bad market: Don’t just do something, stand there! It works wonders.
To give the Washington Post a fair shake, I should add that it sought the advice of three financial professionals, not just one. And the third guy got it right, in my opinion. His name is David G. Speck, who is a managing director of investments at Speck-Caudron Investment Group of Wachovia Securities in Alexandria, Virginia. I don’t know Mr. Speck; never heard of him before yesterday. But he’s clearly tasted the Kool-Aid the first guy told us to avoid, and I’m sure his clients are glad he did. Here’s what he had to say:
In an uncertain market, the best thing you can do is avoid any strategy that is predicated on hoping you guess right on stock movements. Over time, the market always goes up, and the only way to participate is by being invested at a level that does not cause you to lose sleep.
A reasonable strategy is to buy several well-managed stock mutual funds that cover a broad base — domestic large-, mid- and small-cap stocks, blue-chip dividend stocks, and global/foreign.
But keep some of your money in short-term cash instruments — CDs, traditional money markets, Treasury bills. You’ll get low interest, but you also get the flexibility to invest back in the market.
Most important, don’t panic or make panicky decisions. Successful investors are balanced and diversified, invest long-term and typically hold on to investments that are well-managed even when values fluctuate.
I raise my mug of Kool-Aid to Mr. Speck for excellent investing advice.