What You Need to Do Now
Adopt the One Investment Strategy You Need Today
Let's face it: a lot of people have lost a lot of money since the stock market peaked in March 2000. In light of this, what changes do we recommend for our clients' investment portfolios?
To be sure, we are carefully-and repeatedly-reviewing our clients' investments. But our conclusion has been that no changes are warranted in their portfolios. Of course, we realize that this could change at any time as events unfold. That's why we keep watching the news, studying the markets, evaluating the investments we've recommended, and communicating with our clients. Nonetheless, we have seen nothing that leads us to believe that we need to modify the investments that our clients own; nor do we believe that we'll need to change this outlook (although of course we're constantly retesting that hypothesis).
Because our clients own carefully designed, highly diversified, long-term portfolios, they can now sit tight with their money. But this doesn't mean that you should. Quite the contrary. That's because most investors' portfolios aren't like the ones our clients have, and as a result, sitting tight is the last thing most investors-you?-should be doing.
Have You Gotten Yourself into Another Fine Mess, Ollie?
Sadly (but predictably, if you'd been tuning in to my radio and TV shows or reading my newsletter throughout the 1990s), too many consumers have only recently discovered that they are not the investment geniuses they thought they were. Here are just a few of the cocky-and unsustainable-sentiments many people expressed in the late 1990s:
"Who needs insurance? My quadrupling-every-quarter tech stocks will solve all my family's financial needs!"
"Who needs to diversify? The more money you put in other investments, the less you have in Internet stocks! People who diversify are missing out on lost profits."
"Who needs to own bonds? Government bonds are for old ladies! The real action is in eBay, Cisco, Nortel, Amazon.com, AOL, and dozens more like them."
"Why leave money in cash? If I need money, I'll just sell a few shares of stock. My on-line discount broker will send it to me anytime I ask, and in the meantime, I can keep all my money fully invested so it'll keep doubling in value."
"Who needs to hire a financial advisor? I get all the hot stock tips I need from Motley Fool, and it's free!"
You would be amazed how much difficulty we had convincing people in 1998 and 1999 to stay out of technology stocks and avoid all the new dotcom stocks coming onto the market. Consumers kept hearing stories of people who had turned small investments into huge fortunes in remarkably short times, and they wanted to know how to cash in, too.
Today, the people who never bought Internet mutual funds and technology stocks consider themselves fortunate (and, often, vindicated). Although their portfolio didn't double in a year, they have not lost 95% of it, either.
The hapless investors who once thought tech stocks were the key to wealth have learned the error of their ways. They've quit day trading and gotten real jobs again; they're buying mutual funds once more; and even Motley Fool-which laid off most of its 400 or so staff after reportedly suffering huge financial losses, fired its chief executive and saw one of its three founders quit to become a producer at ESPN (not exactly known for its financial coverage)-has hooked up with a financial planning firm to provide its on-line users with advice-for a fee.
So much for the fools of the late 1990s.
It's No Longer Fun and Games
Yes, like everyone else who avoided NASDAQ's losses, we'd been feeling a little smug. Until NASDAQ's losses spread to the rest of the stock market. Today, like everyone else, we wonder if any of the old rules still apply, and we wonder what's going to come next.
No one can predict the future, of course, and we'd be the last to try. But one thing is certain: the United States of America will emerge from our current troubles far stronger than we are today, and this is the only fact we need to guide us as we develop effective, safe, and profitable investment strategies for the future.
So let me show you how to build the type of investment portfolio you should have had in the first place, so you're better able to survive our current economic environment and thrive in the next one.
Own a carefully designed, highly diversified, long-term portfolio.
Let's examine this statement piece by piece.
First, Make Sure Your Portfolio Is Carefully Designed
Too often, people's portfolios look like their attics: there's a whole bunch of stuff in there-most of it junk-and nobody knows how it got there, what it was for, or why it wasn't thrown out years ago.
Does your portfolio look like an attic or the lobby of the Waldorf-Astoria? When we design an investment portfolio for a client, the first thing we do is evaluate his or her need for cash reserves (that's why I delayed discussing investment strategies until now but talked about cash reserves in chapter 1). Only after we have verified that the client has sufficient cash reserves do we begin to contemplate what his or her investment portfolio should look like.
Therefore, the first thing you need to do is set aside sufficient cash reserves.
People often call us because they are interested in opening a mutual fund account. Sometimes, our initial phone conversation reveals that they owe thousands of dollars to credit card companies and all they've got is a few hundred dollars in a bank account. Sorry, we tell them, you need to pay off the debt first, accumulate several thousand dollars in cash reserves, and then call us to open a mutual fund account. I suspect that, after we hang up the phone, many of them call another firm to get what they want.
Once, while appearing on a popular television show, I made the mistake of saying that you can open a mutual account with as little as $100 (actually, many funds let you open an account with just $25, but that's not the point). After that broadcast, I received many e-mails and letters from people wanting to know how to do this. Not only do these people know little about investing (let alone mutual funds), they make it clear that the reason they want to open an account with $100 is because $100 is all they have. Now, I talk less about account minimums and more about the importance of cash reserves and your need to eliminate credit card debt.
There's no doubt about it: the first thing you need to do is set aside sufficient cash reserves. If you have no debt (other than a mortgage, which is really an asset, not a debt) and have ample cash reserves, you are ready to allocate your remaining assets into a diversified investment portfolio. So, let's do so.