“One size fits all” applies to so few things in life — not even Sansabelt pants — that it’s a wonder the expression isn’t buried in the verbal bone heap that includes words such as conflagration and scrivener. Yet if you ask an expert like Bob Johnson, a sort of unity in diversity can help all investors all take the first steps on the road to what you might call a “holy grail portfolio.”
“One fundamental tenet is diversification,” says Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. “The old adage of ‘don’t put all your eggs in one basket’ is as true today as it was when Harry Markowitz first analyzed the concept in the 1950s.”
And so Johnson is on the mark when he highlights key ingredients — common stocks and the Vanguard S&P 500 Index fund (ticker: VFINX) among them — that a great many investors should consider.
Joanne Li, dean of Florida International University’s College of Business in Miami, agrees with the diversification principle. “Some might call it an all-weather portfolio with a discipline to diversify across asset classes, sectors, industries and market capitalization sizes,” Li says.
[See: 7 of the Best Stocks to Buy for 2018.]
Trouble is, all kinds of philosophies crowd the marketplace, some of them proven (value investing), others not so much ( market timing). Nor does it help when bitcoin blasts to such stratospheric heights that second-guessers everywhere ask, “Why should I invest the old-fashioned way when I could be buying cryptocurrencies by the bitload?”
Yet bitcoin — a very volatile gamble in the short run — is not the kind of stuff on which great retirement nest eggs rest — unless, of course, you enjoy speculating on a currency backed by no central government but that presents an alarming, increasing appeal to hackers the world over.
And instead of following bitcoin’s bouncing ball of price spikes and troughs, there’s another number investors need to track: the personal rate of return or ROR, says James Demmert, founder and managing partner of Main Street Research in Sausalito, California.
Here’s how Demmert explains it: “If you need a 6 percent ROR to get to retirement and for the funds to last your life, this can assist you in knowing that you don’t need 100 percent stock exposure,” he says. “You could achieve this number with just 60 percent — thereby taking less risk. The balance could be invested in bonds to reduce risk.”
In fact, it’s tough enough trying to beat the stock market based on hunches and gut feelings, says Graham Summers, president and chief market strategist at Phoenix Capital Research in the District of Columbia.
“Unless you want to spend multiple hours per day for several years perfecting the art of stock investing, you’re best off just putting your capital in a fund that tracks the broader index,” Summers says. “You’ll likely end up outperforming most pros anyway.”
Chasing your own holy grail also boils down to an extension of this basic metaphor, as in: What lines your golden cup at the end of the day?
[See: 10 Investing Themes to Remember for 2018.]
“Income is ultimately the only outcome that matters if your investment plan is geared toward one day achieving financial freedom,” says Ryan Krueger of Krueger & Catalano Capital Partners in Houston.
To that end, “Consistently paying dividend stocks have been shown to outperform the stock market based on price appreciation and total return as well,” Krueger says. “But the key is that if you’re able to live comfortably on the income payments, you won’t have to worry about the price fluctuations.”
And yet, grails should never serve as static containers of wealth.
“It’s especially important to determine your time horizon, as that can help guide the amount of risk you can take,” says Tracie McMillion, head of global asset allocation at the Wells Fargo Investment Institute. “The longer the time before you need to draw on your assets, the greater your capacity to wait out market downturns.”
Yet if a person’s age can help determine what’s worth striving for, the variable can also cause older market watchers to shrink back and play it too safe.
“Portfolios of risky assets are generally reserved for younger investors,” says Flavio Carrillo, faculty administrator the Business Capital Markets Lab at Florida International University. “Yet not including what may be considered risky assets in more conservative portfolios may be detrimental to growth.”
Carrillo cites this example: “A portfolio made up almost entirely of bonds would have resulted in an annual return of roughly 2 percent over the last five years, hardly anything to write home about.”
And even something just as seemingly safe can present its risks, such as investing in large companies with dividend winning streaks that last for decades.
“They can change on a dime when economic conditions or changes in corporate strategies dictate a reduction or suspension of a dividend,” says Keith Baker, a professor of mortgage banking at North Lake College in Irving, Texas.
Cases of this abound, Baker notes. “Dow Chemical (NYSE: DWDP) cut its dividend 64 percent in 2009 when an investment funding partner backed out of an acquisition deal Dow was obligated to complete. And most recently, General Electric ( GE) lowered its dividend by 50 percent.” That happened in November in the wake of deep financial problems, and marked only the second time GE had lowered its dividend since the Great Depression.
So what’s a befuddled investor to do? Johnson’s elevator speech for grail chasers boils down to this: “Invest in broadly diversified, low-cost stock index funds, essentially earning the return of the broad market.”
[See: 7 Utility Stocks with Powerful Dividends.]
Then, he says, seal it with a kiss: “I believe that most individuals should follow the KISS principle: ‘Keep it simple, stupid.'”
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Diversify to Find the Holy Grail of Investing originally appeared on usnews.com
