Although it's a bright spot that consumers are saving more, investors still have a long way to go. Even contributing the maximum $5,500 to an IRA ($6,500 for consumers age 50 and older) won't be enough for many consumers to have a comfortable retirement, said Sam McPherson, a certified financial planner based in Brooklyn, N.Y. Failing to save is a lost opportunity.
"I'm always trying to convince [clients] of the wisdom of putting away what they can," he said. "Every year, you get closer to the day you're going to stop earning a regular income."
—By CNBC's Kelli B. Grant
Yes, on the surface things seem grim: Standard & Poor's has downgraded the U.S. government’s credit rating, unemployment is high, and it’s still a little too hot outside. However, I would argue that things are not as dire as some of the pundits would have you believe. Keep in mind that news organizations make money from financial drama, and should not be a source of investing advice.
That said, it’s completely natural to feel unsettled in the current economic environment. However, here are some facts that may help keep things in perspective:
So, while some short-term volatility is to be expected in the coming weeks and months, I advise you not to panic and certainly not to take any rash action.
So, why shouldn’t I take any action?
There has been much written in the wake of the financial crisis that the tried and true investment strategy of buying, holding and rebalancing no longer makes sense in the new world of robotic trading and volatile markets. I was heartened to read the opinion piece by Burton G. Malkiel in the Wall Street Journal of Nov. 18, 2010 in which he puts forth the case for this simple investment strategy that does little to earn advisory fees, but does a great deal to improve a long term investor's chance of earning a reasonable return on his money.
Mr. Malkiel illustrated that a portfolio invested in well-diversified index funds with annual re-balancing starting on January 1, 2000 would have been almost 92% higher on December 31, 2009. This is roughly a 6.5% average annual return during a time period including two severe bear markets. If the investor had consistently added small amounts to the portfolio over this time period, the results would have been even better. This is a strategy known as dollar-cost averaging.
Mr. Malkiel is a professor of economics at Princeton University. I believe he knows what he is talking about. Does the average investor really need an actively managed investment portfolio? The active manager will attempt to convince you his strategy will beat the market but low-cost index funds regularly outperform actively managed funds over the long term. Stop giving your money away. Get smart and realize that the patient investor with the long view and a low-cost diversified investment strategy will prevail in the end.
A successful investor often needs to swim against the tide. Right now, the tide is pulling investors to the perceived safety of bonds. There is probably money still to be made as bond prices ratchet up and yields drift lower, but are bonds the right investment for long term investors? When the bond market turns down, will the average investor be nimble enough to reduce bond holdings before losing more hard earned money?
Bonds are a core holding in any well diversified portfolio, but if your bond allocation has risen above your target allocation, perhaps it is time to consider selling some of your bond holdings. If your equity allocation is underweight, then it may make sense to reinvest some of your bond gains in European equities. The European equity market has been pushed lower by the recent sovereign debt crisis. Since the European governments seem to be taking the right steps to resolve the crisis, there is an opportunity for long term investors to buy European equities at low valuations not seen since the 1980's.
If you need help managing your portfolio, please contact me.
With all of the turmoil in the markets last week, it reminded me of the fable of the tortoise and the hare. The hare ridicules the slow pace of the tortoise, so the tortoise challenges the hare to a race. So assured that her speed will beat the tortoise, the hare takes a nap during the race. By the time she wakes up, the tortoise has crossed the finish line.
The speed at which the markets move is very much at issue in last week's trading systems meltdown. The investor with the long view is more likely to attain their goal by setting their sights on the future prize and moving toward it slowly and steadily.
Some may view the Greek debt crisis as a reason to avoid European stocks, but perhaps it is a reason to look closely at European stocks. A long term investor who wants exposure to non-dollar denominated assets and also exposure to Emerging Markets may be wise to consider an investment. Many European companies have a strong presence in Emerging Market countries. Also, these stocks are still attractive from a valuation standpoint.
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