In the latest edition of the Sound Investing podcast, published by FundAdvice.com, Paul Merriman, Tom Cock and Don McDonald discuss whether your portfolio is built for the amount of risk you can handle, whether a well diversified portfolio only needs 20 stocks, the outrage if you choose to sell down growth assets now and a discussion of how today's global financial crisis happened and what to do about it.
One warning, the radio show is 51 minutes in length and will use up 23MB of download.
If these constraints are not a problem, I recommend you take a look at the latest podcast - Sound Investing - September 26, 2008
For those who have limited time and/or limited download capability the following is a brief summary of the more relevant material that was covered:
Riding out the storm, how is your portfolio doing?
Paul Merriman comments that being a successful investor is not only about the rate of return you need but what risk you are willing to take and make sure your portfolio is built that way.
Don McDonald commented that your emotions are your biggest enemy. He also reflected that we never refer to markets as turbulent when they go up only when they are going down. The reality is that this has occurred in years past. In 1982, unemployment at 10%, interest rates at 20%, the market was down about the same as now. On August 12th the market turned around and was up by 40% at year end.
Back to the Basics
What is the worse thing that can happen to your portfolio. Answer - let your emotions take control. It leads to buying high and selling low.
Myth or Reality: When the news is bad, get out; When the news is good get in
Paul refers to these type of investors as the Dalbar Dummies - referring to the Dalbar study, going back 20 years showing investors receiving less than 50% of the index return because of the behaviour of selling at lows and buying at highs.
You need to learn how to invest mechanically.
Does the government intervention in markets affect the passive investing story?
Markets are never solid nor stable one day at a time. You need to decide whether you have confidence in the long term success of the global economy. If you have that belief in capitalism and that it will survive and grow and go through cleansing periods like now, which is normal, then every person should have a certain amount of fixed income and you stay within your personal risk tolerance and avoid the question are you doing the right thing.
They referred to the question what if the stock market has a period like the Japanese market through the 90s. The response was that if you were in Japan during that period and invested internationally as long as investing in Japan you would have had a much better performance than by investing solely in the Japanese market. The key, having an internationally diversified portfolio.
Paul's Outrage: Why Fidelity's .750 batting average might strike you out
Paul looks at a full page advertisement taken out by Fidelity to try to calm investor nerves in the US. Paul agrees with most of the content.
- volatility is to be expected,
- times like these reinforce the need to plan and diversify,
- have money available on a short term basis for cost of living needs, which is different from long term investing funds
- staying invested to take advantage of the long term market up trend, 3 out of 4 years the market is up
Paul takes issue at Fidelity's final conclusion that an active management approach backed by "thorough research" sets Fidelity apart. Actually this is less important than ever, all you are getting is an additional fee. Index fund managers are getting better returns because of lower expenses not thorough research.