My post late yesterday drew some interesting comments including one that said investors should be emotional. I imagine for some folks that is the way to go but getting all worked about the market would likely cause me to make poor decisions and this blog is meant to be a look over my shoulder after all.
One aspect of managing your own portfolio that I try to convey is putting yourself in a position to not have to be exactly right all the time. You do not have to correctly guess what the market will do in the very short term. When you go 100% cash or some other big bet you leave very little margin for error. There is no reason for a do-it-yourselfer do put themselves in that position. A do-it-yourselfer does not need to get a certain return in the same way that a mutual fund manager would. Your job is not on the line if you lag the market for a couple of years in a row. This being the case why manage your account like your job is on the line.
If you manage your own portfolio for several decades, it is a safe bet you will have good years, relative to the market, and bad years. Good and bad are both inevitable. If you have a long term outlook and you know you will have good years and bad years the urgency to be exactly correct this summer should lessen.
If you absolutely nail it exactly right this summer you could be very wrong next summer or the summer after. If your method of portfolio construction and management allows you to comfortably stay close to the market over time, that is the most important thing.
Wikinvest Wire
8 comments:
Roger,
Your comments are a calming voice compared with the rhetoric showing up these days on CNBC.
I think you are right-on with the comments not to make huge portfolio swings based on potentially short term events. Retirees (like me), in particular need to stick to an asset allocation plan because one really bad move could sink a comfortable retirement.
Just a random thought... why should staying close to THE MARKET matter to the DIY-er? Surely, staying close to your own objectives, or putting yourself in a position where you can meet your future liabilities, matters more. In reality, that's probably going to be about maintaining and growing the purchasing power of your assets - achieving returns above inflation over the long-term. The equity market might be a useful tool to get you there, but it's one among many - alongside bonds / commodities / hedge funds / real estate / VC / timber / insert asset class of choice! With that state of mind, maybe portfolios look rather different and certainly one's attitude to perfromance relative to the S&P or MSCI World or whatever would be different. I know from your posts you use/have used a lot of these asset classes, perhaps all of them, but my point is about the formal or informal benchmark DIYers might use in assessing their success.
By the way, Roger what's your opinion on MIC (one of last year's picks)?
Londoner's perspective suggests the dichotomy between relying on relative returns compared to some benchmark vs absolute returns, which is something that I think needs more attention.
If "the market" is down 20% and my portfolio is only down 16%, should I be pleased, or at least satisfied, that I beat the market handily? If I'm a money manager, I look smarter than the dart board and have given the sales staff something to work with.
If I'm retired and can't re-enter the job market in a meaningful way and have lost 16% of my capital, well, the bottom line is I've lost 16% of my capital. Yippee! Remember, I probably can't just sit and wait until the markets go back up and eventually produce their assumed, but of course not at all guaranteed, long-term rates of return, because at least on the down years I may be withdrawing principal from the account each year to live off of.
Great post Londoner! FWIW I have struggled with the same problem. The SPX is Ok for an equity benchmark, but too volatile for a portfolio benchmark.
Although I diversify with Gold, Real Estate, Commodities, etc. I use a 50%-50% ratio of stocks to bonds (i.e. SPY & AGG) as my benchmark, which I must stay ahead of, or change my allocations.
It is a non-emotional tool that tells me I am making wrong decisions.
If I had followed this system in 2000-2002 I would have saved a lot of money.
OG
Roger. I'm the reader who said "you should be emotional." Intended as comical hysteria to underscore just how close we may be to something awful happening. But, I do believe a "little fear" is a good thing, as posted. We are actually, I think, on the same page. I am not the nut who seems to have a mean sprirted twist, at least I don't think so. But where we differ is expectations and I am surprised that you are ok with "close to the mkt" vs close to one's needs as explained by another poster. I have to think that you were referring to a non retired person who has time on their side. Isn't there a huge difference between final account balance between a year to year return of 8% and a highly volatile account where the "average" annual return is also 8percent? Truly, I am asking. Not meant as rhetoric.
OG. Can you say more about your benchmark? Are you saying that your portfolio is half equity and half a spread of long and short term bonds? Are you saying that your comparison figure for performance is self created..if so, what exactly do you do? Another retiree who continues tobe thankful that he has 70% in cash. MM return is not too bad.
re; Emotional Anonymous
I created a theoretical portfolio in MSN in the same dollar amount as my real portfolio, split 50 - 50 between SPY and AGG. It makes it simple, but it could be any stock/bond split. MSN posts interest and dividends, which is important.
My real portfolio is anything I want it to be, but my aim is to beat the theoretical portfolio on a total dollar basis at least monthly, but I watch it weekly too, in order to know if I must change my tactics. (A more passive investor might aim quarterly)
In essence, if you are not keeping score, how do you know if you are winning or losing the game?
The split between stock and bonds is important because they have been uncorrelated in the past. Also, the big pension plans have very large allocations to equities (like the largest in 25 years). If they start to move to bonds, the theoreticlal portfolio will signal the change.
I chose the 50 - 50 split because a financial advisor of over 35 years once told me that the most successful thing he ever did for clients was to put them in a good balanced fund.
A younger investor might use 70 - 30 or an older might use 30 - 70. You could also benchmark an OEF, but MSN posts interest immediately on the ETF's.
This method sets up a criteria for some sort of absolute returns, versus the relative returns of the SPX, the dichotomy the other Anon poster pointed out.
In retrospect this year, I sold Gold and Energy too soon, but my Real Estate kept me ahead. I'll probably go back into them at lower prices. I use timing and tactical asset allocation to win, I'd even cheat if I could.
To some extent, the method encourages some risk taking, the same as being behind in a game.
Choose your theoretical portfolio carefully, review it often to make sure it meets your needs, and you can be as active or as passive as you want so long as you win.
If you can't win, you can always say the hell with it and go buy a balanced fund.
OG
OG
OG,
I invest similarly. My wife, every Saturday morning, compares account balance change to percentage change on a benchmark. I use a total mkt index. If I'm behind she chews my ass off for not being in fixed income. If I'm ahead, well, she attacks me a little more affectionately. Talk about pressure. All kidding aside, it's hard work and when in doubt I have been using vanguard's balanced fund...Wellington.
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