6 Investing Rules Revisited

Today I'd like everyone to welcome Mike from The Financial Blogger. Mike's main focus on his blog is teaching the best way to control yourself and your money at the same time. Frugality isn't a bad word and in this lesson you'll learn some pretty good tips. Please enjoy the article and let your voice be heard in the comments.


If You Are Young, You Should Invest the Biggest Part of Your Portfolio into Stocks

There is an old rule saying that to determine the portion of stocks to be held in your portfolio, you simply have to take the number “100” and deduct your age. Therefore, being 27, I should hold 73% of my portfolio in stocks and only 27% in bonds and other fixed incomes. This old rule of thumb is based on the fact that the more you age, the less time you have to recuperate from a market drop.

Technically, this rule is not stupid as you should maintain a high percentage of stocks when you are young since it has been proven that stock markets perform over the long term (read more than 15 years). However, there is something stronger than rationality: emotions.

Regardless what your age is, you may or may not like risk. I have seen people that are 27-30 with a conservative portfolio. While I could have pushed them to accept more risk and invest a bigger part of their portfolio into stocks, I prefer to explain them that they would have to put more money aside to assure themselves a comfortable retirement.

When young averse risk investors are influenced by financial advisors and change their investor profile to “fit the plan”, 2 things can happen:

#1 They will suffer from anxiety and lack of sleep!

#2 They will pull out all their investments at the worst moment (in the middle of a market drop).

In both cases, this will have a bad influence on their retirement plan (it will either decrease their life expectancy or seriously damage their portfolio!).

If You Are Young, You Should Invest the Biggest Part of Your Portfolio into Stocks; Revisited:

There are also other factors to consider when you think about your investor profile:

- Your job. This is the emerging trend in the financial academic world. University teachers (such as Moshe Milevski from York University) suggests considering the type of job you have before selecting your investor profile. Therefore, someone working for a government or as a teacher (very stable income) should invest a bigger portion of his investment into stocks. On the other side, salesmen with commission should think about investing mostly in fixed income in order to reach a balance.

- Your Resources. If you are making 6 figures income and you are 30, you should not worry too much about your investments. You have other means to support your lifestyle. After all, you have a good 30 years in front of you to build your assets.

- Other assets. If you have shares in a private company, rental properties or if you run a small business on the side, you should consider those assets as stocks when doing your asset allocation. There is a big debate about rental properties. I personally see them as privileged shares, so you can also think about them as fixed income.

The main factor to determine your investor profile will always remain your risk tolerance. However, considering the above mentioned factors will surely help you understand a more realistic and complete asset allocation.

This post was written by The Financial Blogger, a 27 year old financial planner who writes about his own personal finance situation and how he manages it. He also gives his take on investing strategies and the stock market.

Find the full 6 investing rules revisited:

Part 1: Stocks Always Go Up
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Part 2: Blue Chips Are Safe Investments

Part 3: Diversification allows reducing portfolio risk

Part 4: Gold Goes Up When Stock Markets Go Down

Part 5: You Are Better Be a Owner than a Renter

11 thoughts on “6 Investing Rules Revisited

  1. David, I wasn't referring to compound tables in assessing the markets over time. What I want you to do is look at the track records of managing money by some of the top money mutual fund managers. What you will notice, regardless what year you start, the fund was up in every ten year period. I don't have long term mutual fund sales literature in front of me like I did as a stockbroker, but that is my recollection. My Point is, this kind of thinking fostered the buy and hold philosophy. It just doesn't work if you need your money in one of those dips. And...I think that buy and hold is dead for some time.

    PS, I talked with my friendly broker. His opinion was that most mutual funds began in or after the depression, so only experienced generally rising markets, consequently their track records looked quite good, as your would, too.

  2. I think the majority of Americans have bought into the notion that the market always goes up over time. They've been spoiled by a bull market from 1974 to 2007. If you try to get a long term view of the DJIA from 1974, you need to do an advanced search. Even if you go back to the crash of 1987, on a long term chart of the whole bull market, it looks like a hiccup. The truth is, there can be extended periods of time qwhere there is no growth in the market. The truth is many in this decline, didn't open their 401k statements because they couldn't stomach the news. The truth is, if you look at long term track records of good mutual funds that shows results from every 10 year track record of the fund, there were no losing ten-year periods.

    The problem is markets can be done substantially when it is inappropriate for you. When you need money for college, for a new home, and for retirement. Diversifacation, the mantra of the uninformed, can still bite you hard when you face a big need for cash. the same way.

    There was a book written called "The Ugly American". I think there should be a book called "The Ugly Investor'. A simple trend line connecting the lows in the DOW from 2001, could have saved the average investor a ton of money.

    jared thinks "There has got to be another way to prosper, cultivate adventure, and not get swept down the hole of financial oblivion and it’s risks to ones health and Being." There is no other way. You just need to stop being sheep and start being pro-active. Trust yourself instead of the talking heads.

    1. Thanks for responding to my ' quandering ' of earlier. You made an earlier point about teaching financials in school. What's weird is, this topic STiLL hasen't made it to a public forum. This is the true ' trickle down ' economic model. It trickles down from a socio-economic Parent, or, family member to a child. The Sociological ramifications of that process, well, we have it right now - how's it look?
      What do you think about an economic curriculum pitched to schools? The basics of how the system works taught to grade school level kids? Any history on this?

  3. With all due respect to strategy, security, risk analysis/aversion. All of this has been swept away for a majority of Americans. In the end. It didn't work......as planned. Every single person I know ( excluding the silvered cocktai weenies ) had their ' plan ' extended into the undefined illusion of their ' retirement '.

    This doesn't even begin to address the loss of adventure in jogging in place on the money hamster wheel.

    There has got to be another way to prosper, cultivate adventure, and not get swept down the hole of financial oblivion and it's risks to ones health and Being.

    Working on it. Will get back to you.

  4. It always interests me how people go about preparing for retirement.Salting away some money is a good idea but a lot of people would have thought they had made provision for the later years only to see it disappear over the last 12months. 15 - 20 years is a long time to spend fishing and playing bowls. I think finding something that you love doing and maybe brings in a bit of income to shrink that time of no income is a good part of the mix. Keeping the mind and body active is important if the latter years are going to be enjoyable. Merv

  5. You stated that 2 things can happen if young averse risk investors "change their investor profile to “fit the plan".

    What kind of investment plan is that if it doesn't have downside protection and an exit strategy? Worse if it just work in an up market.

  6. David, you are exactly right. We know from compound interest tables, all we need to do is put away $2,000 a year for about six years starting at 19. By retirement we would be worth millions and later investors, the one you write about, never catch up. Why don't we teach kids that in school?

    1. Mike, the compounding tables make assumptions that are not true. The last 10 years are a great example. There are many 10 year periods where stocks yielded negative or flat returns. Also, the compounding argument always assumes that all dividends are reinvested. These assumptions kill peoples investments. My point is that once you lose 10 years out of the 30-40 that you have available, you never catch up. Nobody has 70 years, or starts at the 1932 bottom as is assumed by most of the funds and advisors.

      Buy in 1929 and you have to hold until 1954 to break even. Buy the nasdaq in 2000 at 5500 and you are still very much underwater. When will the nasdaq be 5500 again? It very much matters what the beginning and ending points are. So here we are on a trading board.

  7. Consider the problem from another angle. We spend the first 25 years of our lives learning. We don't save or invest. We go to school, take entry level jobs, serve in the military etc. From about age 25 to 65 we earn more and invest while advancing in our careers. Then we retire and burn what we invested. The most optimistic investment window is 40 years. Most people don't begin investing at age 25. Certainly, nobody has 70 or 90 years or whatever is used by the "buy and hold" advisors. It is a disaster to lose 10 years in a 40 year window of opportunity. Look at the period from 1965 to 1982 for example. http://stockcharts.com/charts/historical/djia1900.html

  8. Yes, the rule states that you should have equities in your portfolio equal to the reciprocal of your age.

    However our family is faced with an 80 year old mother who needs Memory Unit care. Our fear is that inflation and the cost of health care will destroy the purchasing power of her assets. Suppose, your choice is Treasuries and CDs.

    Three month T-Bills are at 0.18%! Five years T-Bonds yield 2.33%.
    CDs, last time I checked, were 3 mo -0.2%; 6 mo -0.3%; 1 year - 1.00%: 5 year 3%+.

    Clearly, with inflation at 1% to 2%, you have a guaranteed loss in your purchasing power. You are getting a negative return. That doesn't count taxes, which may or may not apply.

    Suppose, you beat inflation by going out five years. Now, you have a capital risk and an opportunity cost if rates double.

    My point, is that 20% equities for mother may be too low in the current environment.

    I have always favored a laddered approach to fixed income investing. You put equal amounts in 6 months, one year, two year ... five year and maybe ten year, depending on the shape of the yield curve. Now when the six months come due, you make a decision. Do I roll it over for another six months or do I go out 6 years. You always have a choice and only part of your ladder is exposed to interest rate risk.

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