The Full Motley: 4Q 2009 Part 2

It was nine months ago today that I started this blog, and as I recall, I introduced a new fund at that time into my 401(k) assets to help leverage against the receding market.  As it turned out, my timing kinda sucked -- if I raised my 401(k) contributions and invested that money solely into the stock market, then my return would be in the ballpark of 50% on that new money.  But in the long-run, I am better off with a focus on the overall asset allocation.  Plus, I personally never want to get too involved in the market to the point that it becomes a second job or a glorified casino.

There are two things that are inevitable in the market: it's going to rise, and it's going to fall.  There will be market booms and there will be other recessions.  During either case, every investor will feel the need to do something, during which most novice investors will usually do the wrong thing.  Next time the market moves substantially, I can simply adjust my assets across more funds based on this handy chart:

Fund # - Real / Current / Target
Fund 29 - 10% / 5% / 5%
Fund 84 - 10% / 10% / 10%
Fund 24 - 22% / 25% / 25%
Fund 113 - 14% / 10% / 10%
Fund 85 - 44% / 50% / 50%

As you can see, I have changed my current allocations (i.e. direction of new money) to match my target.  Now, when the funds in the "real" column (which reflect the actual balance in my portfolio) are skewed, it is because one or more of these five funds is over- or under-performing, which is an indication that I should redistribute the money somewhere else.  If a fund is under-performing, then I want to add more money to it to buy at a discount.  If a fund is over-performing, then I want to remove money from it to sell at a premium.  Bear in mind, this technique works best with indexed mutual funds - and it does not apply to ownership of individual stocks!

Contrariwise to my strategy, what novice investors often do is see that the market is on the rise, so they put all of their money in the greener pastures (no "green" pun intended).  There are market horror stories of investors that held off on the tech stock boom of 1995-2000 until the Y2K fears had gone away, at which point they dumped money into the sector.  March 2000 is when its bubble popped, so all of that money was practically lost as soon as it went in.  (Yes, this is what qualifies as horror in the financial world.)

Conversely, when novice investors see that the market is in rapid decline, they pull all of their money from the market into a money market fund (which is on par with a savings account at the bank).  This prevents them from losing anything, but when the markets rally back, they miss out on the returns.  If they could pull out at the first signs of a massive retreat, such as August 2007 or even October 2008, and then buy in that the first signs of market recovery, such as March 2009, then their portfolio will be awesome!

Unfortunately, there is not enough information to forecast when to move your money.  So in reality, novice investors will stomach the losses as long as they can until they finally say, "enough is enough and its time for a change!"  Or some variation of that, and they move their money into stable investments right before the market turns around.  Having been burned by the fire, they hold off as long as possible before buying into the market again.  A common result is to watch them buy in at $10, sell at $6.50, and then buy back at $10.20.

In either case, going "all-in" or "all-out" requires perfect timing.  The pitfall stems from the old adage: "what's good for the goose is good for the gander," but in reality the modified adage of "you can have your cake, and eat it too" is more appropriate.  When it is time to look at your portfolio, the trick is to hedge the best possible outcome with the worst case scenario.  Asset allocation is the most effortless way of doing it.

As well as making the change to incoming assets, what I also want to do for tomorrow is move 5% from my Hi-Yield Corporate Bond Fund #29 to the Total Stock Market Index Fund #85 and move 3% from the International Index Fund #113 to the Explorer Fund #24 (this will put 98% of my portfolio within my target) based on the chart below:

Fund # - Real / Current / Target / Future
Fund 29 - 10% / 5% / 5% / 5%
Fund 84 - 10% / 10% / 10% / 10%
Fund 24 - 22% / 25% / 25% / 25%
Fund 113 - 14% / 10% / 10% / 11%
Fund 85 - 44% / 50% / 50% / 49%

If only courtship & dating were so simple.



DISCLAIMER: Although many of you know that I work in finance, please be aware that I am neither licensed nor permitted to give advice and if you want to get specific recommendations, then you should consult with a financial advisor or reputable financial sources, my favorite website is CNNFN.com and my favorite radio station is KFNN 1510 AM. Many financial plans are at no cost to you (because the advisers are paid by the investments where your money is placed).

The Full Motley: 4Q 2009 Part 1

Ok, it is getting time for my 4Q review, and things are looking good!

The other day or so, I heard on the radio how this market recovery has outpaced experts' opinions, which is good because it has definitely outpaced everything I've said.  I expected it to raise above 10,000 by the end of the year, and it did that a few weeks ago.  I also expected it to retreat below 9,000, and it blew right into 10,000, and then retreated down to 9,750, but I don't think it's been back to even 9,500, so that is really a lot better than I expected.

There are a couple thoughts I have about that: one being that all these minor retreats that we have not been seeing will compound into one massive retreat for February or March (or based on how far off my expectations have been thusfar, maybe it will happen in early January instead).  Alternatively, I think it could be that many people are holding large portions of cash, and they're reinvesting more and more cash each time we hit these major benchmarks.  It would be a great strategy honestly, albeit the ideal would have been for them to dump it all into the markets in March when the DOW was scaling down to 6,500.

Regardless, I can change my allocations from my current to my target since my Total Bond Market holdings are nearing 10% now, but I still have a few days to consider it.

Fund # - Current / Target
Fund 29 - 0% / 5%
Fund 84 - 55% / 10%
Fund 24 - 15% / 25%
Fund 113 - 5% / 10%
Fund 85 - 25% / 50%