Terrible Time or Best Time?

I cringe every time I hear people comment about how it’s a terrible time for real estate and what stock (or mutual fund) is doing so well that you have to buy now. It’s no secret that in order to make money in any market you have to buy at the bottom – not when things are doing well, and you have to hold for the long term (5 or more years). Yet (according to a study by American Funds), despite recent volatility, a long period of market advances has created a new surge of short-term performance chasing as investors flock to sectors, asset classes or funds with the highest returns.

They also state the following:

A proliferation of products has enabled investors to invest in increasingly narrow slices of the market that are recording out-sized gains, even though they already may have missed much of the advance. (They are talking about these highly targeted Exchange Traded Funds).

Institutional investors tend to hire and fire managers based on short-term results, in search of higher returns. (Notice how fast these active fund managers come and go now.)

Research has shown that switching from an under-performing investment on the basis of short term criteria can hurt long-term results. (Short term buying and selling creates taxable events and cost more so it impacts long term results. Besides, who on the planet knows when the right time is to buy or sell? )

A period of under-performance by a proven manager with a solid long-term record can represent a buying opportunity, not necessarily a reason to sell. (The same holds true of under-performance of an asset class or sector.)

Until research shows otherwise MPT (Modern Portfolio Theory) still rules. MPT basically says that the risk in a portfolio of diverse individual stocks or mutual funds will be less than the risk inherent in holding any single one of the individual stocks or mutual funds (provided the risks of the various stocks are not directly related). See the 1952 Nobel prize winning paper on MPT by our local guy – Bill Sharpe.

Tired of the mish mash of holdings that you call a portfolio? Then attend my teleclass on December 12th to figure out where you have too much and what you need more of. Only a diversified portfolio can give you a more consistent return and reduce your risk and tax liability. I can also help you develop a system that you can monitor on your own.

Coaching Question – What would your ideal portfolio do for you?