Safe investing and solidifying your retirement
When Boring Is Exciting
by P.J. DiNuzzo
|Invest with Confidence|
It's thrilling to attend a sporting event where the outcome's in doubt until the final minute. And many movies leave viewers hanging until just seconds before the credits roll.
But why would you want to take a roller coaster ride with your investments? While it might be nice to outperform your loud-mouthed neighbor's portfolio, the bottom line is to safely grow your investments and solidify your retirement.
Clients sometimes forget that their portfolio isn't supposed to be a source of amusement. If you want thrills, buy a John Grisham book or watch a James Bond movie. Forget about marketing gimmicks such as CNBC's "Million Dollar Portfolio Challenge," which is the antithesis of good investing -- or get rich quick schemes.
So, what exactly should you be considering? None of the following suggestions will make you jump up and applaud, but when retirement time rolls around, odds are you'll be pleased.
Success is directly correlated to "time in the market," not "timing the market." A good index fund may be the very definition of boring, but it's going to do its job and allow you to sleep at night. A year from now, the returns of a portfolio built around index funds might not knock your socks off, especially compared to that neighbor who bet the farm on a hot startup, but check back in 20 years.
Timing the market is a fool's game. There's no way to predict how it will behave over the short run.
Next, be sure to diversify across a broad range of low correlated investments/asset classes. You'll hear classifications such as U.S. large-cap, U.S. large-cap value, U.S. small-cap, U.S. small-cap value, real estate, commodities, international large-cap value, international small-cap value and emerging markets, to name a few.
Buy as many of the above listed investments as you can, using indexes throughout your entire portfolio, if possible. That's because the markets are like a seesaw; some classes are going up, and some are going down. That diversification ultimately protects you.
Remember, your portfolio is not a garden. What looks to the untrained or undisciplined eye to be a weed that needs pulled is just a normal area of the market rotating out of favor, typically for a year or two. Be patient.
Aside from stocks, you'll also want some fixed income investments in your portfolio. That means bonds.
Consider establishing a bond ladder, which is where your bonds expire at regular intervals over a set period, typically five years. The ladder ensures you're never stuck for too long with bonds paying below prevailing market rates.
Make sure to buy only investment grade bonds/bond indexes. Don't succumb to the lure of risky "junk bonds" with seductive interest rates. This brings us to asset allocation.
Over time, asset allocation changes. A young adult just entering the workforce has years to invest and can better absorb the inherent risk of a stock-heavy portfolio. But as one nears retirement and, hopefully, is closing in on a sufficient retirement nest egg, it's a wise idea to start slanting the portfolio more heavily toward fixed income.
On average, the most aggressive portfolio should contain 70 percent stocks and 30 percent bonds. Reverse those percentages for the most conservative portfolios.
In all probability, you're going to need a little help. An experienced SEC Registered Investment Advisor (RIA) is preferable for investors who like to delegate. Ideally, the RIA has had a long relationship with Dimensional Fund Advisors (DFA), which is a pioneer in the area of indexing.
Also look for advisors who are members of the National Association of Personal Financial Advisors (NAPFA), which sets professionalism standards for fee-only advisors. Another sign of a quality advisor is membership in the Paladin Registry, which is akin to an industry honor roll.
Meantime, self-directed or do-it-yourself investors should establish a relationship with The Vanguard Group as custodian.
Finally, it bears repeating, but make sure to regularly walk away from your portfolio. Ignore urges to tinker and second guess yourself; they are usually incorrect "gut" feelings.
Remember, your primary objectives are to make as much money as you can over your own unique time horizon, with as little risk as possible. If you follow this general advice, you can do so, all the while enjoying your life, family and peace of mind. And what's more important than that?
P.J. DiNuzzo, CPA/PFS, MBA, MSTx, is founder, president and chief investment officer of DiNuzzo Investment Advisors, Inc. of Beaver, PA. He may be reached at pjdinuzzo @dinuzzo.com or 724-728-6564. Visit his Web site at dinuzzo.com.
Take the Next Step:
- Decide whether you've been a patient or impatient investor
- Consider what investment options might be best for your "time horizon"
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