WHAT TO DO AND WHAT NOT TO DO!

Time to author another weblog! I have been thinking about this one for quite a while. I have been getting a lot of questions about what to do and what not to do in light of current economic and financial problems.

My family is calling; my friends ask me; and my past clients are calling me.

I don’t need to go into the details of what is going on as you can’t help but be familiar with everything. I commented on all this in an earlier blog dated September 16th, 2008. This writing will build on and supplement that article.

So what do you do? What do they do? What does anyone do? Well, the answer is: it depends! Not really an answer you say? This is like being a kid and asking my mother for something I wanted. Her answer was either “we’ll see” or “God willing”. Of course, both of these answers were her way of saying NO.

Back to the problem at hand. The answer is simple. But everyone has their own current situation and place in life and thus their own customized answer to the questions of what to do!

Let’s say you are in your 20’s, 30’s or early 40’s. You should be buying equities. Remember the saying: sell high and buy low. This is a good description of today i.e. buy low. Your overall asset mix should a minimum of 10% bonds in 20’s rising to 30% by 40’s.

If you are in your late 40’s and 50’s, there is the need to begin lowering the volatility of your portfolio by moving a larger percentage of the total into bonds or fixed income. For example, if you are in your early 50’s, maybe you should have 30% to 35% in bonds.

By the time you retire, you should have worked this bond/fixed income percentage up to at least 40%. Some might say 45% or 50%.

Annual rebalancing to your overall allocation targets is appropriate. I know, it is scary and the thought of putting money into equities now must seem crazy. But by using well diversified stock funds, you get the equity market exposure but don’t have the single stock risk.

So, what to do? It depends on your age and situation but in general buy low and sell high; staying diversified by using mutual funds. You might want to get some help from a FEE ONLY advisor.

Now, for what not to do. Did you think I was going to forget this part? How can you read about all the Ponzi schemes that have been discovered recently and forget about this?
The schemes are complicated and of course there are other frauds going on that haven’t been discovered yet. And, there are things that you shouldn’t do that are completely honest but maybe not good!

So, the bottom line for me is “don’t invest in something that you don’t understand”. If you don’t know how something works, then don’t buy it. For example, what about the 130/30 funds? Do you know how they work? Would you buy one if someone told you that they are designed to always make money by being “market neutral”? If you could be market neutral and always have a gain, who are the suckers who are always losing money? Come on; really, do you believe this?

What about hedge funds. Do you know how they work? Sure, they hedge their risk so that they too only make positive returns. Ok, why doesn’t everyone just buy hedge funds? Let’s all make money and no one will lose money! The market doesn’t work that way. For every winner, there has to be a loser. Which one are you? What about all the Madoff investors; are they the winners or the losers?

There is something to be said for plain vanilla “things” whether they be mutual funds or stocks or bonds. If it gets too complicated and you don’t understand how the sponsors can do what they profess to be able to do, then maybe they really can’t do it and they are just taking your money and hoping they will do well.

Let the buyer beware. Remember the words of P.T. Barnum; “there is a sucker born every day”. Don’t you be one of them!

Let me know what you think!