When I first started
writing Lummer's Logic about two years ago, I often stated basic principles that I felt
most individual investors should follow as part of their investment strategy. But I
haven't done that in quite a while. In the meantime, our marketing people who count Web
hits tell me my readership has grown 100 times since the beginning (when my mother was the
only reader) to today (it now consists of mom, dad, and the 98 people in their bridge
club). It's clear from some of the questions I receive that many of you are unfamiliar
with those basic tenets, so I thought it was time to restate some of them.
In case you don't know, the title of this week's column is
a takeoff on a very good movie called "The Tao of Steve" that was recently
released, and, judging by the number of empty seats in the Santa Rosa Multiplex, very few
people saw. The movie is about a guy in his late twenties who, when it comes to dating
women, follows a philosophy consisting of three key principles: Don't have an agenda, be
excellent, and be patient. Since I was always unsuccessful at dating, but was nevertheless
intrigued by the principles, I decided to apply them to investments.
Don't Have an Agenda
At least don't have a short-term agenda. You should be
investing your 401(k) plan for your long-term retirement future, not just for the next few
years. So build your strategy around those goals. While it's natural to be curious about
how events such as last week's market volatility affected your plan balance, it should not
prompt you to make changes to the plan.
Here is this week's scary statistic: A solid research study
by Wayne Gates of John Hancock found that 55 percent of 401(k) plan participants would
reduce their equity holdings after a severe decline in the market. In other words, more
than half would make the classic dumb mistake for long-term investors: selling at the
bottom of a market and locking in losses. Why would they do that? Do they really believe
that after a decline in the market, stocks will continue to fall over the long
term? Clearly those investors are worried about short-term volatility. Pick a strategy
that makes sense for your time horizon, and stick with it.
Be Excellent
When it comes to investing for retirement, being excellent
means two things. First, put as much as you can toward retirement. I can't promise that
any one fund will outperform another fund, and I certainly can't guarantee to you what
rate of return you will earn on your portfolio. But there is one thing I can tell you for
sure: The more you invest, the more you will have for your retirement, and the higher the
likelihood that you will meet your retirement objectives.
Second, it is excellent to diversify your portfolio across
many types of securities and investments. We can't predict which sector is going to return
the most in any given year. In January most of you probably thought that technology stocks
would be the best performing sector in the market this year. How many of you will make
that claim today? The best you can do is to spread your money around to reduce risk.
Be Patient
Being a patient investor means, first, having humble
expectations. A few weeks ago, I cited research pointing out that many 401(k) participants
expect returns of 20 percent per year for the next few years, and I was highly critical of
using those expectations to plan your retirement. Indeed, some of you were critical of my
criticism (including one person who claimed to have earned a 100 percent rate of return
since January). How many of you think you are going to earn 20 percent in 2000?
Along with reasonable return expectations, you should pick
your funds conservatively. Focus on funds with a good track record, steady management, and
solid risk controls. And don't go after funds with hot short-term performance. Hot funds
often cool down, and you can lose ground with them even during an up market. Be satisfied
with solid returns on your portfolio and the knowledge that you'll be making money over
the long run.
Well, that's my Tao. Somehow, I don't think it will be made
into a movie. Perhaps I should have stayed with the dating theme ... |
