Monday, June 10, 2013
Some Good Advice on Long Term Investing from the Pages of the Wall Street Journal
Once investors accept that volatility isn't the enemy, advisers should focus on two things to help them stay comfortable in the market. First, make sure clients have enough liquidity to meet their needs through downturns, so they don't have to sell when the market bottoms. Second, make sure they're comfortable with their portfolio's assets and allocations. That way, clients won't be tempted to sell in a panic if the market turns down.
Investors and advisers should also make sure that portfolios are truly diversified. Looking at the asset-class breakdown may not tell the whole story. For example, an asset class called hedge funds may actually be highly correlated to equity markets and not all that different from other investments.
Investors have two problems. The first is that they love assets that look like lottery tickets–the ones with the potential to be a home run. They want to buy into the next Google. That preference has led these stocks to have prices that are too high, and historically that has led to lousy returns.
The second problem is that investors typically fail to understand that reversion to the mean for growth stocks is quicker than people anticipate, so growth doesn't last long. People end up overpaying for growth because they don't understand how rapidly excess earnings can disappear. Knowing this, advisers should direct their clients to a portfolio that takes this into account, fits their individual situation and doesn't overvalue growth stocks.