by Mark Zaifman
Jan 2010
Even if you aren't among those who normally make New Year's resolutions —this may be the time when you will want to make and keep them in the year to come.
With stock markets around the world recovering from their lows last year, and a sense that maybe, just maybe the worst may be over, it’s unfortunately too early to take our eye off the ball. As with Dubai ’s debt crisis last month, and the huge national debt countries like Greece , Italy and Ireland are dealing with, not to mention the debt the US has racked up recently; being vigilant and paying attention is not optional.
Just as quick as the billions that have recently been pouring into stock markets and raising equity and commodity prices globally, we’re one financial crisis away from seeing that new money fly out the door seeking shelter before you can say or click ‘sell’ .
As a Spiritus client, you are naturally a long term investor. You have evaluated your risk tolerance, designed an investment portfolio that matches that risk, and whether markets go up or go down, you have a solid financial plan and you stick to it. Emotions do not control your investment decisions. Now having said that, as you watch stock markets rise and rise and watch interest rates on CD’s and Bond yields go lower and lower, the potential is there to turn even my most conservative clients into speculators.
Whether the ultimate results for 2010 are flat, up a little, or down a little, you could be thinking of adjusting your portfolio to improve its performance by taking bigger risks—perhaps more than would be appropriate for you. Given the potential losses inherent in such a strategy, the following resolutions may be helpful as you consider your investment strategy for 2010:
Allocate your assets among bonds, stocks, money market instruments, REIT’s, commodities and funds in proportions that reflect the amount of risk necessary to achieve your goals. In some cases, that may mean that portfolios don't need to be or shouldn't be more conservative ‘just because' someone is older. It should really be about allocating for your particular goals and needs, not ‘just because' you are at a certain age or spending level. Disregard recommendations of all-purpose model portfolios' asset allocations. They may indicate how various investment strategists feel about the near-term attractiveness of stocks and bonds but weren't offered with your particular investment goals and risk tolerance in mind. (Do consider so-called lifestyle or lifecycle funds such as Vanguard Life Strategy Funds. If you don't have the time or inclination to do the necessary initial portfolio construction, disciplined re-balancing and continuous re-alignment as you approach your goal, these will perform these functions.) I recommend these mutual funds in the current and updated version of Your Money or Your Life. Please read Chapter 9 for more details on which Life Strategy Fund may be right for you.
Have realistic expectations of performance. The years of exceptional annual returns for stocks, on the average, are a memory now. Annual Returns averaging below the long-term average of about 8-9 percent annually seem more likely in the foreseeable future. Whatever they are, the average returns for balanced portfolios are likely to be single-digit.
Resolve to maximize your net returns by holding down (a) excessive commissions when buying or selling individual securities and (b) excessive expenses when investing in mutual funds. When investing in taxable accounts, be mindful of the tax consequences of owning mutual funds that make large taxable distributions of realized short- and long-term capital gains. Funds with low turnover and long-term capital gains still belong in taxable accounts and funds that have large amounts of short-term gains and distributions should be placed in retirement accounts, such as IRAs, 401(k)s, or other tax-deferred accounts. Avoid mutual funds that charge a commission or a front-end or back-end load if possible. Using low-cost, low- fee index funds from Vanguard remain my first choice for the value oriented, financially savvy investor.
When investing for income, resist the temptation of chasing high yields. Higher yields are generally associated with higher risk, and with some investments what appears to be yield may actually be a return of capital.
Don't forget bond funds. Tax-exempt state or local government bonds or “municipal” bond funds, whose yields are usually lower than those of taxable issues of comparable credit quality and maturity, may pay you more than you'd have left after taxes when investing in the comparable taxable securities. Do the math: compare your prospective after-tax income from the taxable securities with what you'd get from the tax-exempts.
Accept that there is no shortcut to mutual fund selection. Whether you do it on your own or have me design your investment portfolio, funds have to be studied—primarily in funds' own, SEC-mandated literature—to determine their suitability. Data indicating superior past performance—which funds must report in accordance with SEC regulations and update periodically—don't assure you of superior future performance. Neither do ratings, such as the 5-star ratings for risk-adjusted performance calculated by Morningstar. They may provide you an additional dimension of past performance, but, as Morningstar has long reminded investors, they don't have predictive value. Such data constitute the beginning, not the end, of the selection process, indicating which funds' literature you might study.
Don’t be fooled by mutual funds that claim to be green and sustainable, but are neither.
A few years ago, Paul Hawken wrote a scathing article on how the socially responsible investing industry needed to clean up its act and prevent mutual fund companies that were posing as “green and sustainable” from fooling investors. His article shook up the industry and things in general are much improved. Yet there are still plenty of unscrupulous mutual fund companies marketing themselves as green. Caveat emptor still applies here. Do your homework and make sure before you make any investing decisions that your money is going to a firm that shares your values.
Always remember that stocks and bonds—and the funds that own them—are long-term investments, requiring patience and the ability to ride out market volatility. Stocks and stock funds are unlikely to be, as magazine covers will have you believe, “the 10 (whatever) you must own in 2010.”
Mark Zaifman is founder and president of Spiritus Financial Planning, Inc., a financial planning and investment firm based in the North Bay. Spiritus provides values-based comprehensive financial planning services to individuals and small businesses. He recently advised co-author Vicki Robin on "Your Money or Your Life: Revised and Updated for the 21st Century", published by the Penguin Group in December 2008. He can be reached at (707) 534-9478 or via e-mail at info@spiritusfinancial.com.