Now it’s time to get off the fence. If someday you want enough money to retire, you need to select an investment approach and stick to it.
Regardless of which road you take, there are three rules you must follow in order to make money over the long-term – and maintain your sanity. The three rules are:
1. You are not allowed to change your investment decision timeframe without a note from me.
2. You’re not allowed to predict the future.
3. You can’t have your cake and eat it too.
I’m amazed at the number of people who think they can be a financial planner when they don’t really grasp these three rules. You see…you are far ahead of them. And we discovered that most people break these rules – even though they don’t know it at the time. What did we learn about each approach?
- We learned that market timing can be a good long-term investment approach but not a good short-term strategy.
- Buy and hold is excellent – but difficult to do when the investment pain is too great.
- Asset allocation tries to answer the problems of both approaches above by reducing the pain. But even this strategy can expose investors to too much risk.
Bottom line – nothing is perfect.
There is no silver bullet in investing. If you are going to be an investor, you must come to terms with this reality. If you constantly look for the “perfect” approach, you’ll hop around from each investment scheme to the next just like a cwazy wabbit…and if you do that…Elmer Fudd may just get you this time. Besides, if you think you can change your strategy at exactly the right time, you’re really saying that you know how to time the market and that is against our rules…remember?
The question of course is how to find the strategy that fits you best.
The answer to that question will depend on what you want to achieve and your investment psyche.
Most people need their money to grow as a hedge against inflation. And for most of us, that means we’ll need to include equity in our portfolios. But if you invest in equities (and/or bonds) there is the real possibility that you’ll have to weather some ugly storms.
So here is how I would decide between the strategies for long-term investments:
1. A very risk-averse investor would use asset allocation and weigh the portfolio away from equities (but not completely). The one caveat is that we are in a very low-interest rate environment right now and that could really hurt if your bonds are long-term and rates rise.
2. Buy and hold can work really well if you are the kind of person who never wants to look at her investments statements. If that’s the case, you’re home free.
3. Market timing can be a smart strategy but more difficult to do on your own. You need to be willing to underperform the market short-term in order to capture very good results in the long-term. Obviously, you also have to be very careful about the strategy you use. Do your homework. Make sure it’s a good approach.
I hope this series has been helpful. I’d love to hear about your investment success in the future. (But don’t break any of our rules…I’ll be watching!)