Streetwise for Sunday, April 16, 2017
While it is likely that the stock market will continue to conquer new heights, despite the occasional stumbles of late, careful and deliberate investment planning and analysis remain the basic rules of navigation.
Specifically, a personal investment profile and an on-going investment policy are key elements in any investment program. Without them you will find your investment decisions more difficult and your probability of success dramatically reduced.
An investment profile outlines how you want to invest. It includes your risk tolerance, liquidity requirements, whether you value income over capital appreciation or vice a versa, your tax bracket and finally your investment horizon. However, just developing an initial profile is not sufficient, you need to update it regularly.
Complementing your investment profile is your personal investment policy. In it you set price targets for every investment you have or plan to have. One target should be above your purchase price, and one below it. It also establishes the approximate amount of time you are willing to wait for results. If either price target is reached, or time runs out, you act. The targets should be flexible and adjusted to meet share price trends.
Investing is a judgment game. Therefore, your investment policy should include a pre-defined review process to re-examine a company’s current fundamentals before selling a position. If the fundamental strength has not changed adversely, you may want to sell only a portion of your holding. Keep in mind that stocks leading the market will often continue to outperform market laggards.
Benjamin Graham, legendary investor and author, extolled the virtues of a very simple portfolio policy–the purchase of high-grade bonds plus a diversified list of leading common stocks, a policy that most any investor should be able to carry out with little difficulty.
However, I must caution you regarding the bond segment. There is increasing evidence that the bond markets are headed for difficult times. The problem is the virtually certainty of two to three rate increases this year alone.
Moreover, my forecasts call for interest rates to continue to rise steadily over the next several years. The result will be a steady decline in the price of all fixed income investments. With that scenario, it would be foolish to purchase or stay with investments where falling prices are a virtual certainty.
The declining value of a bond portfolio is only part of the problem. You also must add in the hit you will receive to the future purchasing power of both your interest payments and principal repayment because of inflation. Keep in mind that the compounded annual growth rate of inflation over the past 40 years is 3.2 percent.
Meanwhile, those who follow Graham’s advice will come to realize that the art of investing has a certain unappreciated characteristic, specifically that a creditable return can be achieved with a minimum of effort and capability.
However, to improve upon this easily attainable plateau requires substantial effort and more than a trace of wisdom. Bringing a little extra knowledge and cleverness to bear upon your investment program is unlikely to produce the expected increase in performance. And having an ongoing affair with your portfolio is usually a precursor to being run over by the market.
Remember, stocks are not works of art to be collected. They are intangible objects from which you want to squeeze the greatest monetary return in as short a period as possible. Moreover, I have never met a share of stock that cared who owned it.
Yet, it always amazes me how otherwise intelligent and responsible people seem to disconnect after hearing or reading words such as “did you know,” or “I just learned that…”
Attempting to keep your investments in harmony with the endless stream of advice emanating from Wall Street’s prognosticators is futile. Their job is to get your attention; accurate analysis is secondary. Besides, your well-being is not foremost in anyone’s mind but yours.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.