Invite the six year old who still lives within all of us to stand facing a wall just close enough for the fingertips of your outstretched arm to touch the wall. Then bring your hand to that shoulder and rub the bent elbow with your other hand while chanting “Shorter… shorter… shorter.” At an appropriate moment bring the hand back toward the wall. And it won’t touch.
That’s the way things really happen for us humans; they generally turn out the way we tell ourselves they will. Even the Dow Jones Industrials Average responds to investor invocations every market day. Scientific data helps, to be sure, but there are now so many variables we basically just rub elbows to make the market change. Look at the list of stocks you like and chant “Higher… higher… higher” every day: you will be right 50% of the time if you do it long enough.
Better still, find an advisor who applies an investment strategy you understand and ask for his or her help. If your investments rise in more than 50% of market sessions, you will be glad you did.
I know what you are thinking: …rubbing elbows is more fun.
Many of us select our refrigerators more critically than we select our investments, so let us design an “investment refrigerator” to hold investments we hope will fund our retirement and our legacy.
Ready cash goes into the door shelves, about 10% of total holdings. Common stocks representing ownership in large cap and small cap company stocks, both international and domestic and of growth and of value qualities go onto the refrigeration compartment shelves.
The freezer compartment should hold bonds… short term and longer term, foreign and domestic, corporate, municipal, and government issues. These bonds will act like ice cubes to diminish spoilage among overall portfolio values during market power outages.
The percentage of our bond holdings will be larger or smaller than that of our stock holdings, depending upon how much market risk we can accept without panicking; choose the freezer size accordingly.
Bond holdings should be of a sufficient amount to give us the time we need to endure the most exciting market periods… time to buy stocks low and sell them high.
Now you can picture the dimensions of your investment refrigerator, so plug it in and fill it carefully as the years go by.
You will be glad you did.
A tripod remains steady on an uneven surface, like a three-legged stool or table. A stable investment plan balances on three legs: the desire to make money, the desire not to lose money, and the length of time necessary to carry out the plan.
Such an “investment tripod” can stand firmly on an uneven surface: markets.
Markets fluctuate, introducing the element of risk. When markets tumble, fear drives some investors to sell their holdings at a loss which neutralizes their desire not to lose money…and that tripod tips over.
Greed makes some investors hold an investment beyond its highest possible price, crippling the desire to make money…and that tripod tips over.
The longer a properly balanced collection of investments can stay in the market, the more bumps it can absorb and return to or surpass average market performance over time. If the time horizon is too long, the investor dies before he can enjoy the results of his plan. If the time horizon is too short, the investor may be forced to accept less than average results…and in either case the tripod tips over.
Have you arranged a three-legged investment plan that won’t tip over?
Envision thousands of M&M’s and an empty mayonnaise jar sitting on your table. Drop one M&M into the jar. A minute later drop two M&M’s into the jar. A minute later drop four and a minute after that drop eight, continuing to double the number of candies you drop into the jar at one-minute intervals.
Imagine that you start this precisely at 10:00am and that the jar is completely full at precisely 12:00noon. At what time is the jar half full? *
Albert Einstein probably did not say the process of compounding interest is the strongest force in our universe. But if you can find a place that will pay you a 6% annual rate of interest, whatever cash you have put into that savings “jar” will double in value after a dozen years. It’s well worth the wait.
If you are 50 and you plan to retire at 62, a 6% rate of return on what you put into the “jar” now will double in value again by then. If you can arrange not to draw out that money until you are 74, whatever was there at 62 will have doubled again.
Simply amazing. And profound.
Are you doing this?