12. Buy Low, Sell High
Lessons:
1. Focus on the long-term.
2. Diversify.
3. Rebalance
13. Thank you for attending!
For a complimentary portfolio review
contact:
Dan Federman, CFP®
CERTIFIED FINANCIAL PLANNER™ professional
1-800-808-7488 X101
dfederman@aribaasset.com
Editor's Notes
Focus on Your GoalsStart EarlyInvest in things that outpace inflationWhen it comes to your investments focus on the long-term, diversify, not just among stocks, but among asset classes.Understand the relationship between risk and returnManage volatility by investing like a Merry-go-round, not a roller-coasterDiversify among asset classesRebalance to maintain the “optimal mix” for your risk tolerance, financial goals and time horizon.
Start early.
Taxes and inflation are two other big hurdles everyone faces in their lifelong quest for financial security. When you invest in a 5-year CD earning 3.1% you pay taxes on it, therefore reducing your return. When you take inflation into account, you’re actually losing money.
So what types of investments can give you these types of returns? It’s NOT CDs, checking/savings accounts, or money market accounts. Investments that can provide long-term returns to beat inflation are: Stocks, Bonds (not so much anymore), Real Estate, Oil & Gas Pipelines (aka MLPs)Just as a refresher: stocks represent ownership in a publicly traded company. You are buying a fractional share of the company and will benefit if the company’s profits increase. As an investor you can benefit in two ways: 1) by receiving income in the form of a dividend, or 2) if the value of the company increases, the value of your share of the company will also increase. The potential upside return is unlimited. But the risk is that you can lose your entire investment if the company goes bankrupt. Bonds, on the other hand, represent a loan to a government, institution or company, in exchange for a fixed rate of return plus the return of your principal. Real Estate Investment Trusts (REITs) are publicly traded companies that manage a collection of income-producing real estate (ranging from office buildings to apartment buildings to hospitals or other commercial real estate). Master Limited Partnerships (MLPs) are publicly traded partnerships that typically operate pipelines that store and transport oil & gas.
REIT = Real Estate Investment Trust. These are companies that own and typically operate income-producing real estate.
MLP = Master Limited Partnership – publicly traded partnerships. REITs and MLPs do not pay corporate taxes so long as they “pass-through” their income to shareholders/unitholders as a dividend/distribution.
So now that we know stocks are the best way to invest your long-term money, why doesn’t everyone 100% of their money in stocks? The reason is “volatility.” As this chart shows, the stock market (as measured by the S&P 500) has many big swings (up and down) on a monthly basis. If you look at the 15-year view, the volatility really smooths out. Sine 1926 there have been no 15-year periods in which the stock market has earned a negative return. Therefore, take the long view!
Let’s say you don’t have 15 years to invest. What are you supposed to do with your investments? This is where an understanding of the relationship between “risk” and “return” can help you design an investment portfolio. Every investment has an “expected rate of return” and an expected level of risk, ranging from low risk/low return (i.e. cash/t-bills), all the way to high risk/high return (emerging market and small cap stocks). There’s no such thing as “low risk/high return.” If something sounds too good to be true, it probably is.
So now that we understand risk vs. return. . .which investment would you rather have? Investment A: earns 10 percent. Investment B: earns 8 percent but only has half the risk. If you chose Investment A, you are looking to maximize your return without regard to risk. i.e. You like rollercoasters. If you chose investment B, you care very much about risk. You’d much rather prefer a merry-go-round when it comes to your money. If you are looking to develop a “merry-go-round” portfolio, you want to manage your portfolio in a way that minimizes your risk for a given “expected return” level. This is called “Portfolio Optimization.”
Since no one can consistently predict the future, a prudent way to invest is like the “tortoise” instead of the “hare.”
So now that you know you want a “merry-go-round” you still need to select your investments. Investing should not be viewed as a horse race. Rather it should be viewed as a game of horseshoes. In other words you can still win by being “close.” You do not have to bet on THE best horse. Instead you can bet on ALL the horses. This is called DIVERSIFICATION. Even if you pick the “best” investment out there you really need to make a big bet to get the big payoff you’re looking for. Since no one can predict the future, the best approach in our opinion is to avoid making big bets. Instead, make a series of small “bets” on a variety of asset classes.When designing your investment portfolio, it is critical to assess your personal situation, your requirements for the future and, most importantly, your risk tolerance. Based on the analysis of your personal situation your investment adviser can design an appropriate mix of stocks, bonds and other asset classes to meet both your return and risk requirements.
Recap:Focus on Your GoalsStart EarlyInvest in things that outpace inflationWhen it comes to your investments focus on the long-term, diversify, not just among stocks, but among asset classes.Understand the relationship between risk and returnManage volatility by investing like a Merry-go-round, not a roller-coasterDiversify among asset classesRebalance to maintain the “optimal mix” for your risk tolerance, financial goals and time horizon.
If you’d like a second opinion on your investments, here is my contact information. Thank you for attending!
