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, Security Analysis
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
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.
N.B. I have edited this post from the original form to include affiliate links to the books listed.
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{ 7 comments… read them below or add one }
I haven’t started investing yet. I’m eligible for my company’s retirement plan in about five weeks, and I plan to participate. I also want to start investing little by little, though I’m not sure when, just yet.
If I listened to all the stuff I read on PF blogs, I’d honestly be too scared to put any of my money in the market. PF blogs make it sound like so much work – so much strategy, so much studying – such a crucial, low-margin-for-error thing. It makes it all that much more anxiety-ridden for the novice. No wonder people have been wigging out over the last several Dow fluctuations.
I believe in educating myself from different sources, but I think your advice is best, Mapgirl – we each have to stay cool and watch the advice we heed.
Sistah– Yes, it can certainly look more painful than it is because the type of people who write PF blogs tend to be the type of people that want to get really serious and in depth about this sort of thing. That’s not for everyone, and if you don’t want that you can make it simple– use a target retirement fund, or just a few diversified index funds. It can be easy!
Mapgirl– Preach on! My favorite line: “Live life as a skeptic.” I recommend this in any area, not just personal finance. Get all the information you can, extract what makes the most sense for you, and don’t rely on ANYONE 100%. Anyone can be wrong. Rely on multiple (ideally conflicting) info sources as well as your own head, and you’ll be fine.
Thanks Brad for the encouragement. I appreciate it. I spent a long time contemplating whether or not to say anything at all, hence my chicken out post of general advice.
Sistah Ant – Investing in *individual stocks* IS WORK. That’s why there are professionals who do it for you with mutual funds. But if you want to pick single stocks, start out small. Graham and Dodd tell folks to put 90% of the money into professionally managed investments, like government bonds and mutual funds. They say only put 10% of your money into individual stock investments so as to spread out your risk. For me, it’s mad money of a certain kind and I hold most of my money in mutual funds.
You will be happy to see where your money is in a year if you participate in your company’s retirement plan. Even when I put in only 3% of my salary, I was happy know I had started putting something away, however small it was. Think of the ants who toil and save even the smallest crubms.
The thing with Trent got out of control. I agree with JLP, nickel, you, and others that Trent is wrong about this, and he fought stubbornly to defend himself (don’t we all?) . . . but it didn’t have to turn into what it did.
Trent means well, and so do JLP et al. Sometimes we just get carried away. Your words above put it in proper context, IMO, so don’t worry too much about it. As a college sports fan, I know how crazy we can all get when posting online about something we feel strongly about– you are wise to step back before speaking. We should all do that more often.
Yes! Definitely sell the REIT!
mapgirl,
Good post.
I’m pretty sure I crossed the line somewhere along the way. For that I apologize. I shouldn’t have allowed myself to get so emotional. Readers shouldn’t have to put up with our squabbles.
That said, Trent is wrong if he thinks my post was a personal attack on him.
Haha, took a week, but fivecentnickel got you to name names
Let us all cower in his dominance.
My husband is the same place you are with the REIT, and I know that if a lot of people knew how it was performing, they’d tell him to sell it and put the money into a long-term CD instead. They forget he’s under age 30 and it’s in his Roth IRA. And for him, like Lily, there’s a LOT of time to rebound. If she were retiring next year, it would be a different story.
I’m actually wondering if there’s a list of bloggers who are actually qualified to give advice. I know JLP is, and Art Dinkin is, and who else? There’s a whole lot of “I’m not a financial professional, but I play one on the internet” going around these days, and it can be hard to know who is knowledgeable, and who is just blowing hot air.