KEYS TO BEING A SMARTER INVESTOR - -PART 3
11.DON'T OVER LOAD ON COMPANY STOCK
As many employees at Enron and other large bankrupt
companies learned the hard way, loading up your 401(k)
with your employer’s stock can be disastrous. Both your
job and your retirement security are riding on the fortunes
of a single employer and a single industry.
Financial planners typically recommend limiting company
stock to no more than 5 or 10 percent of the account’s
value. But this can be difficult to do if the employer will
only match your plan contributions with company stock
while restricting how soon you might sell the stock
and diversify through other investment options offered.
Consequently, you may need to try to diversify your overall
portfolio through other types of assets you hold outside
your 401(k) plan.
1 2.DON'T CHASE 'HOT' PERFORMANCE
Today’s hot investments are often tomorrow’s cold
turkeys. The most recent glaring example of this was
tech stocks, represented by the NASDAQ stock index. The
NASDAQ returned a record-smashing 85.6 percent in 1999,
but fell nearly 40 percent the following year, and lost
another 21 percent the next year.
The major problem with chasing the current hottest
investments is that by the time most investors discover
that an asset category or specific investment is “hot,” the
investment often has already realized much or most of its
run-up in value. Consequently, investors often get in at
about the time the investment is ready to fall.
Calculations by DALBAR, a consulting firm, show that
stock investors who frequently trade in and out of mutual
funds earned a meager 3.51 percent annually between
1984 and 2003—dramatically below the 12.98 percent
annual average earned by the S&P 500 stock index over
the same period.
13. DON'T IGNORE 'COOL' PERFORMANCE
The opposite of chasing hot investments is ignoring those
suffering through tough times. Real estate investment
trusts, for example, did poorly in 1998 and 1999, but
boomed in 2000 and 2001 when stocks faltered.
Government bonds lost money in 1994, but returned
nearly 14.5 percent the next year.
A time tested way to avoid the problems of ignoring cool
performance and chasing hot performance is to stay
diversified and stick with the asset allocations spelled
out in your investment policy statement.
14. STAY IN THE MARKET
Nervous investors often sit on the sidelines during
down markets until they’re “convinced” the market is
rebounding. But by the time they get up enough nerve to
get back in, they’ve likely missed much of the rebounding
market’s gains, which commonly occur in the early stages
of recovery.
SEI Investments studied 12 bear markets since World War
II. Investors who either stayed in the market through its
bottom, or were fortunate to enter at the bottom, saw the
S&P 500 gain an average of 32.5 percent (not counting
dividends) during the first year of recovery. Investors who
missed even just the first week of recovery saw their gains
that first year slide to 24.3 percent. Those who waited
three months before getting back in gained only 14.8
percent. The secret is time, not timing!
15. START INVESTING EARLY
Remember the famous image of Archimedes moving the
world on the end of a long lever? Investing over time
provides that same kind of leverage. The longer you invest
money (the longer the lever), the more it “works” for you
by growing faster and faster.
For example, invest $10,000 at an eight percent annual
return inside a tax-deferred account, such as an IRA, and
you end up with $21,589 after ten years. Keep the money
in for 20 years and it grows to $46,610. Keep it in for 30
years and the same $10,000 initial investment balloons
to $100,627.
11.DON'T OVER LOAD ON COMPANY STOCK
As many employees at Enron and other large bankrupt
companies learned the hard way, loading up your 401(k)
with your employer’s stock can be disastrous. Both your
job and your retirement security are riding on the fortunes
of a single employer and a single industry.
Financial planners typically recommend limiting company
stock to no more than 5 or 10 percent of the account’s
value. But this can be difficult to do if the employer will
only match your plan contributions with company stock
while restricting how soon you might sell the stock
and diversify through other investment options offered.
Consequently, you may need to try to diversify your overall
portfolio through other types of assets you hold outside
your 401(k) plan.
1 2.DON'T CHASE 'HOT' PERFORMANCE
Today’s hot investments are often tomorrow’s cold
turkeys. The most recent glaring example of this was
tech stocks, represented by the NASDAQ stock index. The
NASDAQ returned a record-smashing 85.6 percent in 1999,
but fell nearly 40 percent the following year, and lost
another 21 percent the next year.
The major problem with chasing the current hottest
investments is that by the time most investors discover
that an asset category or specific investment is “hot,” the
investment often has already realized much or most of its
run-up in value. Consequently, investors often get in at
about the time the investment is ready to fall.
Calculations by DALBAR, a consulting firm, show that
stock investors who frequently trade in and out of mutual
funds earned a meager 3.51 percent annually between
1984 and 2003—dramatically below the 12.98 percent
annual average earned by the S&P 500 stock index over
the same period.
13. DON'T IGNORE 'COOL' PERFORMANCE
The opposite of chasing hot investments is ignoring those
suffering through tough times. Real estate investment
trusts, for example, did poorly in 1998 and 1999, but
boomed in 2000 and 2001 when stocks faltered.
Government bonds lost money in 1994, but returned
nearly 14.5 percent the next year.
A time tested way to avoid the problems of ignoring cool
performance and chasing hot performance is to stay
diversified and stick with the asset allocations spelled
out in your investment policy statement.
14. STAY IN THE MARKET
Nervous investors often sit on the sidelines during
down markets until they’re “convinced” the market is
rebounding. But by the time they get up enough nerve to
get back in, they’ve likely missed much of the rebounding
market’s gains, which commonly occur in the early stages
of recovery.
SEI Investments studied 12 bear markets since World War
II. Investors who either stayed in the market through its
bottom, or were fortunate to enter at the bottom, saw the
S&P 500 gain an average of 32.5 percent (not counting
dividends) during the first year of recovery. Investors who
missed even just the first week of recovery saw their gains
that first year slide to 24.3 percent. Those who waited
three months before getting back in gained only 14.8
percent. The secret is time, not timing!
15. START INVESTING EARLY
Remember the famous image of Archimedes moving the
world on the end of a long lever? Investing over time
provides that same kind of leverage. The longer you invest
money (the longer the lever), the more it “works” for you
by growing faster and faster.
For example, invest $10,000 at an eight percent annual
return inside a tax-deferred account, such as an IRA, and
you end up with $21,589 after ten years. Keep the money
in for 20 years and it grows to $46,610. Keep it in for 30
years and the same $10,000 initial investment balloons
to $100,627.