Trent’s advice made me exceedingly nervous which is why I wrote my Caveat Lector post last week. First and foremost, I think he should have referred her to a professional before writing anything else. FWIW, I believe JLP of All Financial Matters is a financial consulting professional, so his advice is backed with expertise.
I happen agree with JLP’s basic principles, which I have slightly modified to be affirmative in statement and re-jiggered the order.
1) Have your emotions in check: If Lily is nervous in this market, she needs to consider why. If she’s afraid of losing capital, she’s like a lot of us, but that is no reason to sell everything off. Did she stop and take a moment to see how far she had come? My REIT fund is doing crappy this year, but I’ve had it for almost 4 years, and for the 3 year return, I’m still doing 17+%. Does that mean I should sell it? Not necessarily. I could continue to hold onto it till the market rebounds. I could double down on it and make money as the market rises again. But selling it means I’ve locked in my 17+% 3 year gain, and locked in a flat performance for YTD 2007.
Investing with one’s emotions is not recommended, which is something that the famous Graham and Dodd put forth in their seminal work, Value Investing. One reason why I like Suze Orman is because she points out the connection between one’s emotional experiences and the choices we make with money. Investing is not for the faint of heart. If Lily can’t take the heat, stay out of the kitchen by limiting your exposure, which segues into points #2 and 3.
2) Understand how the market works: If she doesn’t understand how the market works, there are investments she can hold which expose her to less risk. Clearly she’s not sleeping well with what she is holding, but that is no reason to dump them immediately. She needs to stop and evaluate her risk tolerance. Then over time, rebalance her portfolio into an asset allocation model that fits her risk tolerance. This is why planned sales of assets is probably a good strategy for her. This is what founders of IPO’d companies do, because by diversifying over time, they minimize the impact of their sales upon the current market value of the stock. At the same time though, they are diversifying their assets and spreading their risk. (Oops, that’s point #3.)
3) Have a solid asset allocation plan: Because Lily doesn’t have a solid asset allocation plan, as JLP suggests, of course she is going to flounder. She has no idea what she is doing and could probably benefit from professional guidance.
Me personally, I’ve never paid anyone for help, though I’ve put out feelers and have a list of people I should see. I have received help from the information widely available to me through my 401K plan and popular personal investment books like A Random Walk Down Wall Street, Stocks For the Long Run, and the WSJ’s Guide to Personal Finance. (I am reading Value Investing right now, though some of it goes over my head.) The difference between me and Lily is that I am confident in my choices and comfortable with my risk tolerance.
I believe that Trent didn’t consider her time horizon very well. If Lily truly is 20 years away from retirement, say a standard age 65, she actually needs her money to last 20 years beyond that, making her timeframe 40 years! Since that’s a more likely scenario, his advice basically tells her to time the market’s ups and downs. To paraphrase: “Get out now, wait three weeks till you think it’s bottomed out and jump back in.” Well, as the fine print always says, “Past performance is no indication of the future.” So three weeks from now, the market could be soaring once again from Fed action. Heck, he might as well have told her to wait 6 weeks for the FOMC to have had one of their regular meetings. So once again, his advice on timing the market doesn’t seem well-informed. There is timing the market, and then there is doing the research to time the market well. (I heard on the radio the next meeting date is mid-September.) Lily is getting what she paid for.
I’m not knocking Trent as a person. I like his blog and was very happy to add it to my permanent blogroll. He has great information and advice about a lot of stuff, but I also take it with a grain of salt as I recommend anyone do with anything. Live life as a skeptic! Don’t take me too seriously either! His advice varies from the norm of what an investment professional would tell someone at a time like this, which is to remain calm and evaluate risk, asset allocation and consider the time horizon. I mean, honestly, if it’s about assuaging her fears, did he even ask her to take stock (pun intended) in her historical performance? I lost money in this volatile market too, but I remain dedicated to educating myself about my investments and perhaps that’s the gem of advice that he forgot to give her.
But I’ll leave you with a quote from LeVar Burton and Reading Rainbow:
You don’t have to take my word for it.