When the Dow rockets 300 points or the
stocks of retailers, say, get decimated, I devour the news. Here’s my admission:
I’m a buy-and-hold investor, and a lazy one at that. My employer prohibits us
news folks to trade equities on a short-term basis, but even if it didn’t, I’d
still buy and hold.
The bulk of my portfolio is in two
retirement accounts, and neither stock-market gyrations nor major financial
earthquakes prompt me to tweak my allocations. I simply hold a fairly routine
mix of low-cost U.S. and international-stock mutual funds, plus a bond fund, and
I stick to it.
Sure, the markets get volatile but I figure that,
eventually, average historical returns will work in my favor. And, to my mind,
stock-market trading, if you’re not spending many hours a week working on it, is
little more than a guessing game.
The fact is, a buy-and-hold
investor with a decently diversified portfolio should celebrate her ability to
remain firm in the face of financial-news tidal waves which prompt many, less
staunch, to jump in and out of investments, often at the worst possible
time.
Some might say the staunch investor is akin to a
passenger on the Titanic, refusing a lifeboat to safety due to misguided loyalty
to the idea of "buy and hold." But as long as three prerequisites are satisfied,
that investor is among the most prudent savers around: a well-diver- sifted
investment plan, invested in low-cost index funds, with a long-term
outlook.
In fact, if you’re not going to be an active,
pay-attention-every-day investor, setting up a simple plan and then forgetting
about it may be the best retirement-savings decision you make. "What is often
problematic is the middle ground. People will set something up and then follow
it intermittently and on a whim make changes," says John Nofsinger, associate
professor of finance at Washington State University and author of" The
Psychology of Investing."
Those who follow the markets
tangentially but don’t take time for deeper analysis tend to buy high and sell
low. If, like me, you’re not going to spend time daily on your plan, then set it
and forget it.
Note that, unless you have a rock-solid pension
plan from your employer and significant other assets, you’re going to need to
invest. Interest rates on cash simply won’t get most savers to a well-funded
retirement.
What to do
1. Create a plan. That
means investing in low-cost index funds covering the U.S. stock market, perhaps
10% to 25% of your portfolio in international stock funds, plus exposure to
bonds (a typical scenario is 70% or 80% in stocks and 30% or 20% in bonds), and
perhaps some portion in a money-market or cash-type account. Keep in mind that
your focus is not to beat the market.
2. Once your plan is in
place, ignore it. "I do virtually nothing. I do less than I do for my car.
There’s not even a need to change the oil," Mr. Statman says. If rebalancing
worries you, don’t even do that except perhaps once every few years. And make
sure you focus on getting back to your investment plan, rather than chasing the
winners of the moment. "ff the stock market went up that year and maybe
bonds didn’t, so you take a little out of the stock market and put it in bonds
to reallocate to where your targets originally were, I think that’s a good
strategy," Mr. Nofsinger says.
3. Accept risk. Yes, stock-market
investing is risky. But over the long haul, investors are rewarded—if they adopt
a long-term outlook and diversified investment plan. "Risk is not something you
want, but oftentimes risk does go hand in hand with return," says Peng Chen,
chief investment officer of Ibbotson Associates, an investment research and
consulting firm owned by Momingstar in Chicago. Keep in mind: Avoid this risk
with money you need soon, say, in the next year or two. And remember that the
more you invest in one company, sector or country, the more risk you’re taking
on.
4. Stay in for the long haul. We have no idea what’s coming
tomorrow, and past stock-market performance does not predict future results. But
what is your alternative Stick all your cash in a money-market account, a CD
or, slightly riskier, bonds You are not avoiding risk with this plan, simply
shifting to the risk inflation will trump your return.
5. Do
what you can. The investment options available through your retirement plan may
not be ideal. Invest there for the employer match, but ensure diversification
through an account outside your employer plan, perhaps an individual retirement
account or Roth IRA. |
