Hi everyone. Thanks for joining us
Hi everyone. Great to be here
Alright, to get started, I have a very basic question for all of you: why is investing so hard?
It's not. People just think it is because investing professionals use a language all their own.
In reality, it's just a matter of knowing what you want and what investments will best suit those goals
Great question. I agree with Kathy -- I think the jargon of investments can put folks off. Also I think it tends to come across as more complicated than it is.
I think too many folks try to be the next Warren Buffett, when they invest, when really all they need to do is pick a few broadly diversified low-cost funds, and call it a day.
Maybe the question should be, why do so many people fail at investing?
...ah, Manny...that, I think is because of fear and greed. We're scared when our investments lose money; we're greedy when they gain. And in reality we ought to be greedy when everyone else is fearful and fearful when everyone else is greedy
I think the biggest impediment to successful investing is emotions. Two primary emotions drive investing--fear and greed. The problem, to paraphrase Warren Buffett, is that we tend to be greediest when we should be most fearful and tend to most fearful when we should be greediest. I'll give you an example in a sec...
Kathy and I are not planning our answers
Looks like great minds think alike :)
Go back to March 9, 2009. That was the day the stock market bottomed after a catastrophic 18-month plunge of 55%. Who was buying that day? I dare say very few people were buying stocks then. But when a department store has a half-off sale, you rush to buy, right? It's usually the exact opposite with stocks.
I like that analogy, Manny.
Hate to say it, but it's not an original one
So, by taking the emotion out of it, it can become a lot less intimidating
It's impossible not to be emotional, but you should realize that the markets are essentially mathematical. So if you can use some mathematical discipline to put your emotions in check, you'll be far better off
Good advice, Kathy. And don't turn on the TV on a day the market is tanking, right?
yes..the best advice is to step away from the television or computer terminal on a day that you're likely to do something rash -- whether that's buying on a huge upswing or selling into a crash. Go to work. Play with your kids. Take a walk
There are some other factors at work, too. I think too many people invest without understanding the broad characteristics of the things they're investing. So, when you invest in stocks, you need to know they're going to be volatile. But you also need to know that if you invest in a long-term Treasury bond fund or a zero-coupon Treasury bond fund, it's going to be volatile, too, and you could lose a lot of money if interest rates go up.
At the same time, I think too many people try to be geniuses about their investing. You don't need to have bought on March 9, 2009, to be making good investment decisions. Buying and holding and not fiddling with your portfolio too much is usually the best way to go, for most people.
Buy and hold came under a lot of criticism during the big bear market. But what's the alternative? You get out at some point that may or may not be near the top. But when do you get back in? And if you didn't get back in, you may be sitting in a money-market fund that pays nothing and that means it's essentially losing 2% a year after inflation.
Exactly, Manny. None of us know what days the markets are going to move, but if you miss out on the big upswings you lose a huge amount of the market's long-term return. So, sometimes, you just have to glumly accept that you're in a bad stretch that will end ...eventually.
Alright, let's go ahead and start taking some questions from readers.
Here is our first question from Larry.
Hi Larry -- My suggestion would be that you back into the equation. Start with how much income you expect to need in retirement. Figure out how much of that will be accounted for by the pension. Then work your way backwards to come up with how much growth you need from the rest of your assets. Then you can come up with an appropriate allocation for the rest of your portfolio.
A defined benefit pension could best be classified as a bond or an annuity, if you count it at all. But really, you can simply subtract that amount from the amount you need to cover with your other investments
Elizabeth and Kathy, I see where you're going. That makes sense
But in terms of your asset allocation, which is where I think Larry's question is going, it would make sense to count it as a bond, don't you think, Kathy?
Yes, Manny. But I actually think Elizabeth's approach is the one I would take. You can essentially back this amount out of the savings that you need. There's no need to count is as part of your asset allocation until you're actually receiving the money in retirement
Sounds like Larry has a couple of good options here.
Here's our next question from Leigh. It touches on what we were talking about earlier about the emotional side of investing.
The thing to remember is that volatility is normal in the stock market. But over long stretches of time, stocks outperform most other asset classes. What this tells you is two things: Don't invest the rent money in stocks, and don't look at your long-term investments too often because it will drive you crazy.
Also remember that even if you are nearing retirement, you are not going to use all of your retirement money right away. Make sure that you have at least five years of living expenses in something safe and steady...and then, try not to worry too much...
Hi Leigh - I think that's great that you consider yourself to be a long-term investor. It's the only way of investing that makes sense! Personally I believe there could be a large selloff if we go over the fiscal cliff, but I believe it's highly unlikely we will do so. My best suggestion would be that you not look at your portfolio for a few weeks if we get another big downswing.
That being said, if you're feeling this nervous about volatility already, perhaps you need a more conservative portfolio than the one you've currently got?