KISS

Keep it simple, stupid.  Not the easiest thing to do though it seems obvious.

Here are some 'sins' I see often in investing and then some tips from Money (I know I blasted this rag the other day but it does have some good stuff hidden away) magazine.

-Inconsistency.  Investors start and stop.  They get all excited and vow to be good investors and then stop when they want to buy stuff or get bored.  Make it automatic.  Set up your 401(k) or Roth contibutions and, if you are lucky, your after-tax contributions and don't touch them, the amount anyway.  Let dollar cost averaging take over.  Let Vanguard, Fidelity or your company take the money and live on the rest.  If you can't live on the rest, seriously rethink your spending or rethink your career.  Cash comes from only two places--reduced spending or increased salary.   

-Keep an eye on the big picture, not the pieces.  Lots of investors will obsess on one stock or fund and lose sight of what the whole thing--the portfolio-- is doing.  That is why asset allocation is so important.  You should reach the point where no one stock or one fund will sink the ship.  And that goes for your company match as well.  Learn the lessons of Enron. 

Here's what Steve Savage and Jeremy DeGroot at Money say--

1)  Don't sweat timing--here they apply it to buying a fund or stock after it has had a good run-up.  And then selling when it underperforms.  Put more simply--don't buy high and sell low.

2)  Don't chase performance--pretty much the same as above except they warn that chasing short term winners will skew your asset allocation since assets that have performed well in the recent past usually come from the same asset class.  So if you buy them you are piling into one sector and a sector that is high by historical standards and is probably looking for fall.  Which leads to point 3.

3)  Get the right mix-- Figure out your asset allocation and stick with it.  The allocation I use for my son is 70% S&P 500, 15% international and 15% small cap.  Looking back I should have had more in international and small cap.  But to jump into that right now would be chasing performance.  In asset allocation you have to buy the losers along with the winners.  Because a frog today may be a prince tomorrow.  My son got a pretty hefty pay increase so we will take a lot of that to alter the asset allocation.

4)  Rebalance at least once a year--This is hard and I don't always do it.  But I should and so should you.  And you can do it easier than I can because you, like my son, can DIRECT NEW SAVINGS INTO WHATEVER CLASS IS BELOW ITS TARGET WEIGHT.  In other words, if you are low on international, shift gears and tell HR to go from 20% International to 80% International until you are IN BALANCE.

That's about as simple as I can make it.

Comments

[Jay P]

Good topic Bill

This is particularly important if you are married and have two 401ks, multiple old 401ks, other IRAs, etc. I try to keep an updated spreadsheet of everything. Both my wife and I have the same fund company but different slates of investments. I settled down decided on the asset allocation then looked to see which fund groups fit best or has the aspects I like.

One of the guys at work says that Vanguard has a service that you can dump all your investments into (it will update the information as it can) and show you what is exactly your total asset allocation (or I think it does). I'll try to find out more and let you all know.