By: Frank Armstrong
By: Frank Armstrong, CFP, AIF
Nostalgic for those days of yesteryear when everything you touched turned to gold? When stocks could only go up, and bond yields were fat? Discouraged with your portfolio? Is your account giving you that sinking feeling? Looking to recover from a few losses and boost performance a little? Lusting for doubledigit profits? Yearning for more earnings?
After eighteen months of dreary market news, investors are getting a little restless. Deprived of their quick fix and instant gratification, they are looking for new approaches, a new vision, a new path. In short, they are ready to make some basic, avoidable, not very bright mistakes. Guess what? You can bet that some sleazy snake oil salesmen will emerge promising relief. Even as we speak, they are oozing out from under their rocks. The time is right for investors to be offered a chance to break discipline, forget the basics, lose sight of their goals, defy common sense, and do something they will truly regret later.
In true Money Magazine fashion, I’ve made up a short list of enormous mistakes that you can avoid now. I’ve already seen articles in publications that should know better on these very subjects. Do yourself a favor. Just say no. All of them are proven losers with their own history of spectacular failures that sucked billions of investor dollars into bottomless black holes.
Alternative Investments - A catch-all phrase describing everything from exotic derivative strategies, hedge funds, venture capital, to partnerships in oil, gas, leasing or real estate. Many will be offered through “private placements” to “savvy investors” or “accredited investors” on a “limited basis”. The existence of these schemes is proof positive that there’s a sucker born every minute. Common threads are: limited to no liquidity, insufficient market information, lack of regulation, offshore domicile, conflicts of interests between partners and investors, poor accounting, limited recourse, high commissions, hidden fees, concealed risks, and absurd costs. Besides that, they are really pretty attractive. Those that have forgotten the lessons of the 80′s are doomed to repeat them.
Sector Funds - An opportunity for an investor that loaded up on too much tech at the end of the frenzy to utterly destroy himself with one more desperate roll of the dice. All you have to do is take a big bet against the market by over weighting a sector to pick the next big thing. Please don’t be deterred by the overwhelming evidence that consistently timing sectors is highly unlikely. Perhaps you’ll get lucky. Or, perhaps not!
Stretch for yield – After some of the fastest and biggest interest cuts in history, CD’s and bond yields are looking a little anemic. But, if you are willing to suspend the rules of economics and common sense, you can boost those yields right back up there. All you have to do is extend durations, take lower quality bonds, buy illiquid issues, purchase bonds with call options, or buy bonds at a premium. No problem, right? Just don’t get caught when rates start back up, your junk bonds default, the calls arrive, or liquidity disappears. Besides that it’s a piece of cake. All those dunces that lost fortunes in bonds twenty years ago were just clueless. Can’t happen to you.
Resist Temptation - Investing involves risk. Not all years will be great ones. Some will be major disappointments. If your asset allocation (the division between cash, bonds and stocks) is right for your situation, you should be almost indifferent to the market’s annual fluctuations. If your equity portfolio is properly diversified around the world and across investment styles, fluctuations will be minimized.
Count on it. You will be offered a chance to make a major mistake soon. Temptation is everywhere. The siren song of the snake oil salesman is strong and sweet. Especially after a year or two of disappointment. Unfortunately, the only way to win this game is to hold an appropriate asset allocation plan for your situation, keep a long term perspective, focus on fundamentals, exercise discipline, diversify, and stay the course. In times of frustration, quick fixes sound appealing, but rarely pan out.