The Only Financial Advice I’ll Ever Give
Since, in the last two blog posts, I predicted that we would surpass Dow 10,000 and Dow 11,000, I feel compelled to add a few words to this discussion just to make sure that there is no miscommunication.
A word of caution first: I am not a financial professional and do not play one on TV or anywhere else. So please consult with one before making any big move in the markets or anywhere else. The opinions provided in this piece are strictly my own—a financial amateur—and should be taken as such. The fact that they have been informed by some of the best financial authors out there does not negate the need to consult with a financial professional.
Let me begin by saying that no one has a clue which way the markets will go from here. I get the feeling that we are at a crossroads and will either be heading significantly higher or, if not, will tank again and test the lows of about 7,500 in the Dow that we saw in late November 2008. The purpose of this post is not to tell you which stock or mutual fund to buy (although I will mention two funds below, something I will do this one time only), but to help make sure that the distribution of your assets is appropriate for you.
It is not which stocks that you own that will be the key determinant of your financial future. That will of course make a difference, but 95 percent of how you do in the future will be determined by something called asset allocation.
Asset allocation simply refers to how you will divide your money among something else called “asset classes.” Asset classes include stocks, bonds, cash and real estate. The biggest money mistake people make, by far, is that they focus too much on an individual stock or fund (or group of stocks), and they don’t keep the big picture in mind (that is, the entire asset allocation mix). For the money that you do have invested, one very good rule of thumb comes from John Bogle, the founder of Vanguard, the mutual fund company. He recommends, as a very general rule, that you divide your investment among stocks and bonds depending upon your age: a 40-year-old should have 40 percent of their investments in bonds, an 80-year-old should have roughly 80 percent of their money in bonds. Whatever your age, that’s about the percentage of your money that should be in bonds.
Some specifics: while I do own a few stocks, I feel that there is no reason to own any individual stocks. Rather than gamble on a few stocks that may gyrate wildly—who could have seen the end of Bear Stears and Lehman Brothers—own the entire stock market. You can do that by purchasing one mutual fund that owns the entires stock market. It is a Vanguard fund (and yes, one that I own), called the Vanguard Total Stock Market Index (VTSMX). Today that fund sells for about $22, which means for $22 per share you can own a piece of the entire stock market– that is, a tiny portion all of the thousands of stocks on all of the exchanges. That would be a great place to park your long term money—the percentage that is discussed in the paragraph above.
As for where to put your bond money, there is one fund which has performed remarkably well over these last months and years. It is called a “Ginnie Mae” fund, and the one that I own is also a Vanguard fund (all Vanguard funds have no loads or commmissions and tiny expense ratios, which is another key to long term wealth). The symbol for this fund is VFIIX and it just reached a new high at $10,69 per share. It pays an annual yield of just under five percent. That is a great place to park at least a substantial portion of the bond money as outlined above. If you are not invested you can open up an online account at a place like TDAmeritrade or eTrade or Scottrade, etc. and buy the funds through that acccount.
A few words about the other two asset classes—-cash and real estate. Never be afraid to keep money in cash or bank CD’s for a limited amount of time. Safe is always good, especially in today’s turbulent times. However you arrange your investments, you have to be able to sleep at night and if your investments are keeping you up, you should put more of your money in something safe such as cash or a savings account. As for real estate, I am a big believer in buying when there “is blood in the streets,” meaning when everyone else is selling. While real estate prices are continuing to fall, keep in mind that it is a fool’s folly to try and time the bottom of any market, real estate included. Real estate has come down by record levels, so if you are in the market for a home, and can qualify for a loan under the new and much stricter loan rules, today is a great time to buy a house. Look for a really motivated seller and put in a lowball bid—perhaps fifteen percent lower than the asking price— and see what happens. Many people have to sell now just to stay solvent, so you may be able to walk away with the deal of the century.
Lastly, never do anything out of emotion if you can help it. Research connfirms that people tend to do exactly the wrong thing when ruled by emotion. For example, when the Dow sunk to 7,500, many people could not take it anymore, and cashed out. We are significantly above that now, and I believe from a historical perspective, Dow 7,500 will look like a bargain.
One final point that I am sure you already know: never carry credit card balances if you could help it. The percentages they charge on interest should literally be a crime (some upwards of 20 percent). If you come into any money, and have any credit card balances, pay them off first. Credit card companies make the bulk of their money on those that carry the biggest debt load. Don’t let them get rich at your expense.