Four Thoughts: What changes should we make in our investment portfolios?
| Thursday, Aug 26 2010 11:22 AM
Last Updated Thursday, Aug 26 2010 11:22 AM
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Sherod Waite
Daniel Petrey
Mike Bowles
Alex Horvath / The Californian
Sarah Ketchum
A lot of retirement plans have taken a hit over the past couple of years -- enough, anyway, that faith in the markets isn't what it used to be.
Although stocks have generally recovered to one degree or another, volatility continues. Many investors have reacted by shifting their portfolios. Some now favor commodities such as gold.
But is this the way people ought to respond to economic turmoil? We thought we'd turn to local financial advisors for perspective.
Our question: What kinds of changes should we be making to our investment portfolio in this time of uncertainty?
Responses may have been edited for length or clarity.
In times of uncertainty, rather than looking outward -- at the market -- look inward. Investing emotionally in up and down markets will most often negatively impact your actual portfolio return. Caught in an emotional cycle, investors feel confident in bull markets and may take more risk than they should. Then when the bear returns, they lose that confidence and often overreact in the opposite direction.
Timing is difficult and impatience erodes return. Picking an appropriate strategy for each of your goals and sticking with it is often the most viable solution.
Adjust your investment strategy if life circumstances change and not if the stock market changes. Staying focused on your goals will serve you well in tough markets. Now is the time to re-evaluate goals, reassess risk tolerance and time horizon. Now is not the time to try to look into the crystal ball and predict tomorrow's market.
Successful investors create a solid plan and then ride out the bumps and dips in the road. History has shown that investing in a diversified mix of stock and bond investments remains one of the best options to help outpace inflation, accumulate long term wealth and achieve your financial goals.
-- Sherod Waite, financial advisor and partner, Moneywise -- Wealth Management
Obviously, it is extremely important to remember that one size definitely does not fit all when discussing investment portfolios. What might be appropriate for one may be inappropriate for another, depending on risk tolerance, needs, portfolio size, etc.
If a well-diversified and well-constructed investment portfolio has already been implemented to meet an individual's needs, then assessments will need to be conducted to make sure the investment goal hasn't changed and the portfolio is performing accordingly.
Since the current investment landscape continues to deal with many uncertainties, it might be prudent to seek diversification beyond the traditional stocks, bonds and cash. Currently, investment portfolios should consider allocations in alternative or non-market correlated asset classes. These non-correlated asset classes can include but are not limited to: precious metals, long-short funds, managed futures and hedge funds. Exposure to these asset classes has the potential to smooth out volatility over time and help investors stick with a long-range investment plan. As usual, the size of allocation to this asset class will depend on each investor.
It is important for investors not to give up on diversification. Many investors were extremely frustrated by the 2008 credit crisis as almost all asset classes took a beating. This was very atypical and normally all asset classes do not act in unison.
-- Daniel Petrey, wealth advisor with Mestmaker & Petrey Wealth Advisors
In times of economic uncertainty and stock market volatility, investors perceive gloom and doom everywhere. So, it is natural for us to feel that we must "do something" to protect our money. But before you make big changes, I recommend taking a deep breath, putting aside all the noise of the all-knowing pundits and reflecting on your current investments.
Is your current allocation still correct? There's no good formula for the right percentage of stocks -- especially the old 100-minus your age rule. No single answer fits everyone. But I do believe most people cannot afford less than 40 percent in stocks because they need growth to maintain purchasing power. Additionally, I don't think most people can afford the risk of more than 60 percent.
For your appropriate portfolio, cast a broad net. Divide your money between stocks (preferably those that pay a dividend), bonds, real estate and cash. Don't forget emerging markets, commodities (like gold) and, yes, international. Things have changed since the traditional advice of investing heavily in blue chips. Lastly, rebalance (at least) yearly.
I have come to realize that the most important thing you must have to be a successful investor is faith in the future.
-- Mike Bowles, president, Bowles Financial & Insurance Group Inc.
With our current market situation many investors have been asking themselves this same question, and the answer may not be as simple as you would think.
Each individual investor has different goals for their investments. Successful investing requires discipline (both in up markets and down markets) as well as a thought-out strategy. Investors today need to avoid overreacting, and learn more about investment opportunities that may be appropriate for them.
It's important that serious investors seek professional help and stay focused on the big picture. Equally important: Review your portfolio at least once a year and make sure the investments you own are still focused on your long-term plans.
Focus on what you can control. Have a mix of cash, real estate, stocks and bonds; percentages will vary from investor to investor based on risk tolerance, investment experience and time horizon.
-- Sarah Ketchum, financial advisor, Edward Jones