The key to investing - Keep it simple

It has been a time to worry even the savviest investors. The credit markets have been in a crisis, the domestic stock market has been shaky and overseas markets haven't been much better.

There was a recent article in the New York Times about keeping things simple, not just during these times, but at all times. We thought we should share some of these key ideas in these uncertain times.

What should an individual investor do?

Don't try anything fancy. Stick to a simple diversified portfolio, and rebalance periodically to keep your asset allocations in line with your long-term goals.

For most people, we continue to recommend a very basic approach: use investment funds, and stick to your long-term asset allocation - even when the markets are in tumult.

The trick is not to be distracted by market forecasts. You have to diversify against the collective ignorance. It is our view that nobody is in a position to react to these macro issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.

For most individual investors, copying the strategies of big investment institutions is virtually impossible: big investors have access to fund managers and strategies that are beyond the reach of most people.

The only people who should get involved in high-risk investments are sophisticated individuals who have significant resources and a highly qualified investment staff and don't mind losing their capital every once and a while.

David F. Swensen, who manages investments for the $22.5 billion endowment at Yale, declares: "Most people do not have the resources and time to pick market-beating managers of hedge funds, private equity funds or other sophisticated investments. The techniques used by hedge funds can often result in higher taxes than those of regular funds".

Don't try to time the market. Go ahead and rebalance because no one really knows where the market's bottom is. Diversification will buffer a portfolio from declines in specific asset classes.

Mr. Swensen goes on to say that it is fruitless for individual investors to pick stocks. "There is no way that an individual can go out there and compete with all these highly qualified and compensated professionals. Investors should forget market timing entirely. Once an individual sets up a program, it should be rebalanced quarterly or semiannually, but it should be disciplined."

He continues: "When the markets decline, try not to pay attention. Let yourself off the hook. If you pursue the sensible long-term policy, look at it over a five- to ten-year period. Don't look at five months."

We think this is sensible advice and encourage our clients to stick to a simple, tried and true investment strategy of diversification in asset classes, geographic areas and investment styles. Continue to rebalance them based on market conditions and always take the long-term view. If you can ignore the markets, and stick to a strategy, you will achieve your investing objectives.

If you would like to review your current strategy, please call our office for a consultation.