Investing For the Rest of Us – Charting a Course For the Future

As the dust settles from the Wall Street meltdown of 2008, the average investor needs to chart a course that threads its way through future growth and perils. Simply relying on the old investment adages may not be the wisest course. Here’s some things to think about.

(1) Wall Street is not your friend. At this point, it should come as no surprise that the goal on Wall Street is to make money for Wall Street, rather than giving investment advice that the average investor can actually benefit from. Washington makes a lot of noise about reform, but don’t hold your breath about anything happening. We have gone through two major Wall Street screw ups since 2000 that cost most individual investors a good chunk of their portfolios. First was the attempt to convince everyone that there was a “new math” on how to value companies that had some relationship to the internet and, after that didn’t exactly work out, Wall Street moved to use the environment of easy money to package high risk real estate mortgages that fell apart when real estate values started to decline. Even though most investors never owned internet stocks or CDO’s, the collapse of these products helped drive down the stock market in general. To thrive, Wall Street must continue to find and distribute economic “hot spot” products. A good bet in the future might be derivatives created from “cap and trade.” After all, trading air seems ready made for the street.

(2) Take a new look at “asset allocation.” Although asset allocation models do not ensure a profit or protect against a loss, they have become the standard of investment models for many investors. The theory itself is over 50 years old. The world has changed since Dwight Eisenhower was in the White House. Thanks to a developing global economy, asset class correlations are becoming more similar and this increases volatility in a portfolio. Don’t exit asset allocation like the last helicopter out of Saigon, but do avoid the rigid “pigeon holing” of asset classes that’s become prevalent in asset allocation design. Investment managers today need the flexibility to move a little if the asset class returns really moves against them. You can’t take your boat out without a life preserver on board. Your portfolio should be no different.

(3) Does passive indexing investing still work? Index investing was the “flavor of the month” back in the 1990’s when proponents of “efficient markets” promoted that it was so difficult to beat the market that everyone’s best bet was simply to mirror a market index and go to the beach. Today, the market is full of inefficiencies and with the S&P 500 flat lining over the last decade, it’s time to pour the sand out of your shoes and get back in the game.

(4) Portfolio “compression” is the next best idea. The average investor doesn’t need to squeeze all the upside out of a bull market as long as there’s some protection against the next bear. Cutting portfolio volatility should be on your new year’s resolution list. The future market road will continue to be rough and rocky roads generally demand good shock absorbers. If you are a competent investment mechanic, by all means install them yourself. If you need a qualified mechanic, seek one out. If you enjoy a really rough ride, just hang on with your current portfolio. You may get a few teeth knocked out, but that’s not what’s going to hurt the most.

Although the stock market is going through a tough patch, it’s still where a lot of the action is to outpace inflation and grow funds for the future. No promises, no guarantees, but that’s always been the story from the beginning. Going forward, caution will be your best friend. One old adage you will still be able to hold near and dear is that if it looks too good, it probably is.

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