From headlines to bylines, the overwhelming media focus these days is on the debt and the deficit. As the U.S. economy haltingly begins to ease its way out of what has been a significant recessionary cycle, that kind of hand-wringing and glass-half-empty perspective is natural, perhaps even healthy.
There is a general sense that we need to solve some structural problems if we want to get our collective financial fortunes back on sound footing again. At the same time, there is a lot of discussion about what we need to do differently in terms of individual investment strategies. Many individuals, institutions and portfolios have fared poorly in recent years, and there is a tendency to wonder if these structural uncertainties will affect our own investments. Will this affect me? What should we be doing differently? Should we change our investing fundamentals? And, most of all: How do you invest around a mountain of national debt?
The short answer is: you don’t. At least, you don’t do anything differently — assuming you are one of those disciplined investors who has been able to stick to their guns and not get suckered into the latest hot investing trend or stock-picking system. Essentially, you ignore the debt and fall back on Investing 101: Fundamentals, Fundamentals, Fundamentals.
Everyone is wringing their hands about how scary it is out there, but in big-picture terms, nothing has changed. In fact, if anything, it is more important than ever to stick to proven principles of investing. You invest around the deficit by essentially ignoring it and reminding yourself that despite the recession, and despite a financial industry that isn’t shy about promoting the latest gimmick or investment concept, equities are still the best long-term wealth-creation tool around. Before you allow panic about the national economy to influence your investing decisions, take a deep breath and take a few moments and review the following (timeless) investing and portfolio-building guidelines:
All that glitters is not gold
Despite what you may have heard about the effectiveness of gold and other commodities as a hedge against inflation, that’s not actually a good idea. Historically, inflation comes in around 3 percent, and stocks are closer to 10 percent. Avoid the flavor of the month and stick with what works. Stay focused on equity markets and try to ignore the short-term plays that are little more than speculation.
If it seems too good
to be true, it is
Plenty of media personalities and investing “experts” have touted precious metals, but it has become increasingly clear in recent weeks what many of us knew all along: That kind of “investing” is a speculation play and not a fundamentals play. It is sobering to realize that the expected return on any commodity is actually zero. Buying futures is fundamentally different from buying stocks and bonds — it’s a kind of gambling, not ownership. Save the gambling for Vegas.
If you have to rush to buy, it’s not a good idea
There is no asset so time-sensitive that you need buy it right now. Anyone who tells you differently should be viewed with skepticism. It is a good idea to include high-quality short-term bonds to offset the volatility of the equities in your portfolio. Stick to AAA-rated bonds, U.S. government securities, and bonds backed by other large established countries.
Don’t try to
time the market
It is a mistake to try to time the market. Any investment strategy that involves timing instead of long-term structural fundamentals will eventually come back and bite you. That holds true for tough times as well. If you try to wait for the sun to come out, you’ll likely be too late. Get in and stay in; don’t get fancy.
Make decisions based
on the long term
Always be thinking long term. Investing is not a get-rich-quick scheme; it’s a way of building value over the long haul. You should always be looking at least 10 years ahead in terms of structuring your investment portfolio. That means don’t panic and don’t chase bubbles, and avoid volatile assets like gold, silver, commodities and long bonds. Keep in mind, if you own a diversified portfolio of equities you already have some existing exposure to commodities; there is no need to “double down” in those asset categories.
Don’t make decisions
in a vacuum
That means build a cohesive and balanced portfolio, not a random collection of assets. There is no way to get around the short- and medium-range volatility of the market if you own equities, but a balanced portfolio will pay off in the long run. A basic formula of 50 percent equities and 50 percent fixed income assets remains the best advice. Diversify with some international and emerging market stocks, and be prepared to rebalance periodically during highs and lows.
Mark Lloyd is the founder of The Lloyd Group Inc., which serves the distinctive financial needs of those nearing retirement and those already retired. His website is www.thelloydgroupinc.com.