Through the end of last week the S&P 500 had posted a return that was up just over 19% for the year! We’ve seen investors pull money out of fixed income investments at a record pace as they are chasing the impressive returns that the equities markets have posted. If you’ve been in the market you’ve certainly enjoyed some positive returns but the question now is where do we go from here? Below we’ve taken a few moments to put together some talking points that every investor should consider with their own portfolio. As we are over half way through 2013 we find this a perfect time to revisit some reminders that we’ve touched on throughout this record-breaking year:
(1) Have a Plan – Take a moment and ask yourself this : What am I really trying to accomplish? What are my real goals? If you are going on a road trip you don’t simply get in the car and hope you end up at your destination… do you?! Take the time to put together a plan that you can follow through in both good and bad markets. Think of the ‘SMART’ criteria when putting together any plan.
S – Specific: nail down what you are looking to accomplish.
M – Measurable: have an amount or specific goal.
A – Attainable: keep it realistic.
R – Relevant: make it applicable to you and your lifestyle.
T – Time-bound: put a time frame to it.
(2) Tune out the Financial Media – The various ‘talking heads’ on financial shows should be viewed as simply entertainment and not much more! If they truly knew what the next hot stock was or created a new strategy would they really share it with the viewing public?! A perfect example of this is Jim Cramer from CNBC and Mad Money; according to stats on his stock recommendations he is average at best. The Motley Fool and several other sources have tracked Jim Cramer’s stock picks as being right approximately 44% of the time. By the way…most of these guys and gals only tell you what to buy. When was the last time they let you know what or when to sell? That doesn’t get as many good TV ratings…
(3) Rebalancing Strategy – Once you have an asset allocation and investment policy in place, it is important to have a strategy to keep it balanced. At face value rebalancing seems so simple but it’s actually not done well by most. Disciplined rebalancing can be very challenging for investors as it requires you to sell positions that are performing well and buy others that are not performing up to expectations. A portfolio that is not rebalanced will guarantee that it will be over weighted at market peaks and underweighted at market lows – a guaranteed formula for poor performance. When do YOU rebalance? Is it driven by the calendar, by market results or a scheduled call from an advisor?
(4) Indexing – We’ve discussed the fact that in an average year over 80% of mutual fund managers can’t beat their benchmark or index. To put it simply investors are paying higher fees (for active management) to ultimately get underperformance. We are always reminded of the popular saying, “if you can’t beat them, join them!” Consider adding index positions and then compliment with other positions in areas that you want more exposure. Lastly, we recently shared a fact that is worth repeating: Over 2/3 of all professional money managers invest their own personal wealth into index and ETF funds instead of the very products they sell the average investor!
(5) Time Horizon – Know what your time horizon is and focus specifically on that time frame. Do your best to ignore what the market is doing on a daily or even weekly basis. The markets will move up and down and no matter how much an individual monitors the market there is nothing they can do about it. If you are retiring in 20 years then focus on that time frame and even think about pushing that back as you will most likely have at least 15 to 20 years in retirement as well! To put this in perspective when you are driving down the highway you don’t look at the road five or 10 feet in front of your car; you look well down the road so you can stay on course.
(6) Understand Fees – Excessive and hidden fees eat away your portfolio at an alarming rate! Take the time to do your due diligence to look for more cost effective options. Investors need to remember that unlike the markets, management fees and expenses are largely controllable. Every dollar paid in extravagant management fees or trading commissions is simply a dollar less earning potential returns. If you shop for the lowest price on a car or other purchase shouldn’t you consider doing the same with your portfolio? The old adage of “you get what you pay for” isn’t always the case when it comes to investing. Be smart and educate yourself!
(7) Mutual Fund Managers – Investors continue to pay managers a yearly fee that they have not earned in most situations. Take a moment to look at the fees and then compare the manager’s performance to their peers and their respective benchmarks. Ask yourself if your mutual fund has earned the right to charge me for their performance? How have they performed in the past when a typical market correction has occurred? Lastly, is your mutual funds like most; a glorified index fund that cannot consistently beat the market?
(8) Chasing Performance – Nearly every investor has heard the term, “past performance is no indication of future results.” The problem is investors don’t let this simple sentence really register or sink in. Investors continue to make investment decisions based on past performance. It’s human nature to look at how an investment has done and connect future potential to those results. Our brains have been trained since the stone age to expect similar results from hunting where we most recently did well during a hunt.
In closing this weeks article we simply ask you keep your eye on the ball. Summer is wrapping up and before you know it Mr. Market and all the noise that clutters his head and yours will be singing a new tune. Remember what Sir John Templeton once said about the four most dangerous words in investing:
“This time it’s different”
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