Articles By Dave
The following is an article written
and published by Dave Peterson:
Life
Is Difficult (written
March, 2001)
The year 2000 (and so far in 2001)
has been a very difficult time for investors. The Dow Jones Industrial
Average is down almost 12% from its (12) month high. The S&P
500 is down over 23% from its (12) month high. The NASDAQ Index
which tracks primarily small company stocks including a large number
of tech stocks is now down almost 60% from its (12) month high.
This has been the worst period for the US stock markets since 1981.
Several weeks ago, I had a 75-year-old
retiree come into my office. She indicated that she watched the
cable investment shows daily and spent much of her time on her investments.
She invested her modest nest egg in tech stocks and watched it shrink
by more than 40% over the past year or so.
She asked what she could have done
differently and, more importantly, what she should do in the future?
Her tech stock investing is what we call "chasing returns".
It means concentrating your investments in those areas where returns
have been highest in very recent past. Investors poured money into
tech and growth stocks in 1999 and early in 2000. Newspapers and
magazines closely covered the newly minted dot.com millionaires
and the Internet technology companies. Profits didn't matter, only
market share. Unfortunately, chasing returns is a risky strategy.
She asked if she should dump her
tech stocks right now. That is certainly an option. However, I feel
that it would probably be wise to hold the quality tech stocks until
they recover. They may very well not return to their previous highs,
but the market is, in my opinion, oversold.
Then she asked what she should do
with the proceeds from the sale of her tech stocks. I recommended
that she reinvest in a well-designed, diversified portfolio - one,
which allows her to sleep well at night.
Diversification Can Help Prevent
Disasters
The classic investment mix is 60%
stocks and 40% bonds and fixed income. Your own allocation may differ
based on your particular situation. Those investors who are more
aggressive would probably want more stocks; those less aggressive
might want less. From there, the stocks should be further diversified
into at least (4) asset classes and the bonds and fixed income into
at least (2) asset classes. This broad diversification can help
to smooth out the ups and downs. It's the classic "not having
all your eggs in one basket". It is also the exact opposite
of chasing returns.
Chasing returns with tech stocks
is only one of a number of investment approaches which have left
investors and their spouses sleepless. Another example would be
investing all your money in stocks. Many people aren't comfortable
with an all-stock portfolio in a down market.
It should be carefully noted that
this retiree is not alone in heavily investing in tech stocks. Many
so-called "investment professionals" chased returns with
their clients' money and are now reaping the fruits of their foolishness.
I believe a wise financial advisor who truly cares about his or
her clients should consider a portfolio with broad diversification
with an eye to both risk and long-term growth. Yes, some clients
want high-risk, all-stock portfolios, but for many people it would
be wise to have a portion of their portfolio in bonds and fixed
income investments. This is especially true for older and more conservative
clients.
Should You Do It Yourself?
I know a number of people who have
successfully invested their own money over the years. Investing
is not rocket science. But then car repair isn't either. I regularly
see my mechanic to repair and maintain my car rather than do it
myself. When you are dealing with a significant amount of money,
why open yourself to serious investment mistakes like this 75-year-old
retiree?
It is also important to note that
financial advice is not just about your investments. Most people
want and need financial advice in many other areas of their lives.
This would include estate planning, retirement planning, saving
on taxes, and getting the right insurance coverage and not paying
too much for it. Your financial advisor should be able to provide
sound advice in each of these areas.
And in down markets, a trusted financial
advisor can give you the confidence and perspective to weather the
storm. If you live in Minnesota you need to expect some cold weather
each year. If you follow any sports team, you need to expect that
they will lose some of their games. And if you invest in stocks
and bonds you need to expect some ups and downs. Plan on it. There
is no free lunch. Higher returns are accompanied by higher risks
and greater volatility. We need to carefully manage the risks through
proper diversification and asset allocation, but be assured that
no one can completely eliminate the ups and downs and no one can
guarantee exactly how future events will unfold... Be very careful
of those who claim otherwise.
Dave Peterson is a Certified
Financial Planner (CFP) with over (13) years experience in the financial
services industry. He personally purchased his first mutual fund
in 1973 and then, in 1973-4, saw it decline dramatically in the
worst stock market since the Great Depression. Dave has a MBA from
the University of Iowa with an emphasis on investing and degrees
in Mathematics and Business Administration from the University of
Minnesota. He lives in Andover, Minnesota, with his wife, Helen,
and their two children, Amy and Jennifer. He has an office in Maple
Grove, Minnesota, and can be reached at 763-416-1857. Securities
and advisory services offered through SII Investments, Inc. Member
NASD, SIPC, and a Registered Investment Advisor.
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Securities and Advisory Services
Offered Through
SII Investments, Inc.
Member NASD/SIPC and a
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