Getting back in? Having a broad mix of investments is way to avoid belly ache
Published 25/11/2010 | 05:00
SO you've been out of the market for some time now and you hope that the great belly ache of 2008 won't return. Maybe even the General Motors public offering sounded appetising. How should you get back to the table?
Of course, simply gorging on one kind of stock (like auto companies or gold mining) is like eating the same old greasy hamburger. That's what got you into trouble in the first place. A broad mix of investments is much safer.
Let's say you were in the market last year. Contrary to public opinion, it was a great year for investors after the collapse of 2008. Here's what you would have missed if you were on the sidelines sheepishly eating porridge.
Small growth stocks, as measured by the Russell 2000 Index, rose 34pc. Non-US stocks, as measured by the MSCI EAFE index, were up almost 32pc. The S&P 500 climbed 26pc. Small value (bargain-priced) stocks, gained about 21pc.
Of course, those returns aren't guaranteed going forward, nor do they make up for the dismal returns of the previous year, the worst performance for big stocks since 1931.
Nor would they paper over the three straight years of declines for big companies from 2000 to 2002.
Yet there's much more to investing than US blue chips. If you only had a diversified bond portfolio in 2008, you would have seen an almost 14pc return in US treasuries and 8.3pc gain in government mortgage-backed bonds.
Those who jump in and out of the market miss rebounds because they see stocks as an all-or-nothing proposal.
Forgive me for being the investment nutritionist looking over my half-specs, but you can have it all if you know what balanced diet is best for you.
One good rule of thumb is to roughly match the percentage of bonds and stocks to your age. If you can't afford to lose any money, you shouldn't have all of your portfolio in stocks.
If you're 50, half should be in stocks, half in bonds. Then customise your portfolio to take advantage of growth and income across the world.
Think China, India and Brazil as anchors for emerging-market growth. Think real estate investment trusts, non-US bonds and mortgage securities for income.
You can then take it one step further. A customised plan avoids the often misguided 'all-in' notion that you're fully invested in US stocks when the market looks good and when there is widespread negative sentiment you're out -- the opposite of a successful 'buy low, sell high' strategy.
Generally, you probably have a gut feeling on what's right for you. Are you a high-risk investor? Can you afford to lose 40pc of your portfolio? This means you're pretty secure and not near retirement. You can always go to a registered investment adviser or fee-only certified financial planner to have them build a portfolio for you. Since they are not brokers, they can set you up in low-cost mutual or exchange-traded funds that are closely matched to your gut check.
Or you can explore one of the many online sites that have pre-allocated portfolios. Looking for an age-based portfolio? Try FolioInvesting and one of their four "life stage" portfolios.
I recently discovered a site called MyPlanIQ.com, which offers several portfolios for a wide range of investing styles. One cautious approach that caught my eye was the site's "Strategic Asset Allocation Conservative" plan.
Using low-cost index exchange-traded funds, the conservative portfolio combined the Vanguard Total Bond Market, Vanguard Total Stock, Vanguard REIT Index, Vanguard Emerging Markets, Powershares DB Commodity Index Tracking and Vanguard FTSE All-World ex-US funds.
Some 60pc of this portfolio was in the Vanguard Total Bond fund, a broad-based sampling of most of the US fixed-income market. The portfolio has returned almost 7pc over the past five years.
You can forget about today's news or yesterday's rally with a customised portfolio. It focuses on your goals and allays your fears through a long-term strategy.
What really matters is not a sumptuous gain or the heartburn of a decline. A balanced investment diet can offer you what amounts to a banquet over time.