How to get back into stocks

November 19, 2010

stocksSo you’ve been out of the market for some time now and you hope that the great belly ache of 2008 won’t return. Maybe even the GM public offering sounded appetizing. How should you get back to the table?

Of course, simply gorging on one kind of stock (like auto companies or gold mining), is like eating the same old greasy hamburger. That’s what got you into trouble in the first place. A broad mix of investments is much safer.

Let’s say you were in the market last year. Contrary to public opinion, it was great year for investors after the collapse of 2008. Here’s what you would have missed if you were on the sidelines sheepishly eating porridge.

Small growth stocks, as measured by the Russell 2000 Index, rose 34 percent. Non-U.S. stocks, as measured by the MSCI EAFE index, were up almost 32 percent. The S&P 500 climbed 26 percent. Small value (bargain-priced) stocks, gained about 21 percent.

Of course, those returns aren’t guaranteed going forward nor do they make up for the dismal returns of the previous year, the worst performance for big stocks since 1931. Nor would they paper over the three straight years of declines for big companies from 2000 to 2002.

Yet there’s much more to investing than U.S. blue chips. If you only had a diversified bond portfolio in 2008, you would have seen an almost 14 percent return in U.S. treasuries and 8.3 percent gain in government mortgage-backed bonds.

Those who jump in and out of the market miss rebounds because they see stocks as an all-or-nothing proposal.

Forgive me for being the investment nutritionist looking over my half-specs, but you can have it all if you know what balanced diet is best for you.

One good rule of thumb is to roughly match the percentage of bonds and stocks to your age. If you can’t afford to lose any money, you shouldn’t have all of your portfolio in stocks.

If you’re 50, half should be in stocks, half in bonds. Then customize your portfolio to take advantage of growth and income across the world. Think China, India and Brazil as anchors for emerging-market growth. Think real estate investment trusts, non-U.S. bonds and mortgage securities for income.

You can then take it one step further. A customized plan avoids the often misguided “all-in” notion that you’re fully invested in U.S. stocks when the market looks good and you’re out based on widespread negative sentiment — the opposite of a successful “buy low, sell high” strategy.

Generally, you probably have a gut feeling on what’s right for you. Are you a high-risk investor? Can you afford to lose 40 percent of your portfolio? This means you’re pretty secure and not near retirement.

You can always go to a registered investment adviser or fee-only certified financial planner to have them build a portfolio for you. Since they are not brokers, they can set you up in low-cost mutual or exchange-traded funds that are closely matched to your gut check.

Or you can explore one of the many online sites that have pre-allocated portfolios. Looking for an age-based portfolio? Try FolioInvesting and one of their four “life stage” portfolios.

I recently discovered a site called, which offers several portfolios for a wide range of investing styles. One cautious approach that caught my eye was the site’s “Strategic Asset Allocation Conservative” plan.

Using low-cost index exchange-traded funds, the conservative portfolio combined the Vanguard Total Bond Market (BND), Vanguard Total Stock (VTI), Vanguard REIT Index (VNQ), Vanguard Emerging Markets (VWO), Powershares DB Commodity Index Tracking (DBC) and Vanguard FTSE All-World ex-US (VEU) funds. Some 60 percent of this portfolio was in the Vanguard Total Bond fund, a broad-based sampling of most of the U.S. fixed-income market. The portfolio has returned almost 7 percent over the past five years.

You can forget about today’s news or yesterday’s rally with a customized portfolio. It focuses on your goals and allays your fears through a long-term strategy.

What really matters is not a sumptuous gain or the heartburn of a decline. A balanced investment diet can offer you what amounts to a banquet over time.

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Financial Markets vs. Las Vegas
In the Financial Markets – there are many, many “financial instruments” that you can buy and they vary daily.
In Las Vegas – there are a limited number of games you can play.
In the Financial Markets – they won’t tell you about all of the Financial instruments, just the ones they think they can do the best with (meaning get the most of your money).
In Las Vegas – you can choose the game you want to play.
In the Financial Markets – once you start a financial instrument, you can’t just change to another without paying more.
In Las Vegas – you can switch between games at your leisure. Even between casinos with no fees.
In the Financial Markets – they can’t tell you what you will make on the instrument.
In Las Vegas – you know how much you stand to win.
In the Financial Markets – they can’t tell you how much you will loose.
In Las Vegas – you know exactly what you stand to loose.
In the Financial Markets – exactly how a financial instrument works is a mystery to 95% of the people, including those that are selling it to you. They don’t really know exactly where the money goes, you just get a piece of paper mailed to you with what they think you should have made or lost. You really don’t have any way of verifying it at all. Just trust them.
In Las Vegas – you know exactly how a game works. Anyone involved can explain it to you in simple terms. You can always verify the results. Trust you own eyes.
In the Financial Markets – the rules “are subject to change” and you may or may not be notified
In Las Vegas – the rules to each game are well known and cannot change.
In the Financial Markets – there are almost no regulations or rules that they have to follow.
In Las Vegas – the casinos are very tightly regulated.
In the Financial Markets – it is difficult to find any real, cohesive information on who regulates what. It is very confusing.
In Las Vegas – the regulations are publicly posted and easily found by the common person with a quick Google search.

I could go on….
If we all invested only in things we understand and can be measured, then Wall street would not exist.

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