Apply Principles of Parenting to Your Portfolio
Need help handling today’s tumultuous financial markets? Don’t think finance. Think family.
Managing money is a lot like managing children, professionals say. It can be painful and frustrating at times, but parents with patience and discipline are likely to find the results gratifying in the end.
“Long-term, we are optimistic about the potential for our teenagers and our portfolio,” said Alan Bernstein, a parent of two and an investment advisor with Stratigraphic Asset Management in Coral Gables, Fla. “But those unpredictable short-term movements are maddening.”
Herewith, some tips on “parenting” your portfolio to increase your odds of long-term success, regardless of markets’ short-term gyrations:
*
Learn the Basics
“The first thing I tell parents is that none of us are born knowing how to parent any more than we are born knowing how to drive a car,” said Elizabeth Pantley, a Seattle parent-educator. “We have to study and learn and talk to people. The more we know, the better job we do.”
Knowledge keeps new parents from calling psychologists when a 2-year-old throws a temper tantrum. It also should keep seasoned investors from selling in a panic--or from loading their portfolios with technology stocks without understanding the risks.
Savvy investors know that stock prices are subject to sharp, unpredictable and often-embarrassing swings in value. That makes putting the rent money in stocks as inappropriate as taking a toddler to an opera.
When investments are in the right places--short-term money in safe and predictable vehicles such as bank deposits, long-term money in riskier but higher-yielding stocks--investors can relax knowing that no matter how bad the market’s near-term behavior, it eventually will grow out of it.
*
Have a Mission
Everyone needs a clear idea of the handful of important values they hope to pass on to their children--such as integrity, courage and kindness, said Victoria Collins, an Irvine-based certified financial planner. Keeping these big-picture values in mind helps remind parents why it’s not a good idea to preach the virtues of honesty while lying about a child’s age so you can get a discount at the movies.
The finance corollary is called an investment policy statement, said Collins, who has produced as many investment books--five--as she has children.
This statement should detail what you want to accomplish with your portfolio--your short-term and long-term goals--and what you aren’t willing to do for potential financial gain, she said. Listing your limitations is a way to spell out your tolerance for risk.
“The investment policy statement gives the parameters of what you can tolerate and provides guidance on where you want to go and how you want to get there,” Collins said.
Although this policy statement won’t help you pick individual securities, it will help you figure out broadly how much money ought to go into which category of investment--stocks, bonds, cash and real estate, for example.
*
Be Persistent
“Investing regularly is like telling your kids to make their beds,” said Barbara Steinmetz, a planner with Steinmetz Financial Planning in Burlingame, Calif. “Every day, you tell them. Every day, they groan, and say, ‘But Mom ‘ But after a while, it becomes routine--it’s not a sacrifice, it’s just what you do.”
Persistent investing is called dollar-cost averaging. Anyone who invests through a 401(k) retirement savings plan already is doing dollar-cost averaging. Every month, the same amount goes into savings, often through some sort of automatic deduction.
With 401(k) plans, the deduction comes out of your paycheck. However, investors whose employers don’t offer such plans can set up dollar-cost-averaging programs directly with many mutual funds, banks or brokerages.
There are two main advantages to such persistent investing, experts say. The first is that it makes investing a habit--much like making the bed.
The second is that if you invest regular amounts, in good times and bad, you buy more shares when stock prices are down and fewer when prices are up. If investment values rise over time, as they have historically, this strategy pays rich long-term rewards.
Consider a person who invests $120 a month, every month, in the same stock or mutual fund, said Kirk Bogard, regional area manager and vice president of Fidelity Investments in Newport Beach. The first month, the stock costs $8; the second, it costs $12; and the third, it costs $10.
“Your average price is $10 a share, right? Wrong,” Bogard said. “Your average share price is $9.73. Because you’re buying more when the price is down, you’ve brought down your average purchase price.”
*
Be Patient
It would be great if you could jump into the stock market right before it rises and jump out before it falls again--and get the cycles right every time. But just as it’s nearly impossible to have a video camera ready at hand when children do something priceless, market rallies and routs are highly unpredictable. And the cost of not being there at the right times is dear.
Consider what would have happened if an investor had missed the 50 best days of the last major bull market cycle, from 1983 through the first quarter of 2000. Those 50 days amounted to just about 1% of the entire period.
An investor in the market for that entire period would have earned an average annual return of 14.7% in stocks, according to an analysis by the Leuthold Group, an investment research firm. Yet an investor who was out of the market for the 50 best days, though in for the rest, would have earned just 4.6% a year, Leuthold data show.
“By trying to time the market, you potentially miss out on market rallies that can substantially improve your overall return and long-term wealth,” said Bob Doll, chief investment officer at Merrill Lynch Investment Managers. “What’s most important is not timing the market, but rather time in the market.”
*
Keep Your Balance
Meloni Hallock, partner in the personal financial counseling group at Ernst & Young in Los Angeles, tells clients they can’t keep all their money in one investment category, just as children can’t grow up eating just one type of food.
“You are not going to be a healthy, well-rounded person without balance,” she said. “You’ve got to hit all the food groups.”
For most investors, that means keeping some money in stocks to provide growth and protection against inflation; some in bonds to provide income and stability; and some in cash accounts--such as money-market funds or bank savings--for safety and liquidity.
A diversified investment mix not only provides money to handle different goals, it creates a portfolio that’s less subject to stomach-turning swings in value, experts note.
*
Stick to Your Standards
Financial disasters can happen when investors fail to stick to reasonable standards. Having standards means maintaining portfolio diversification by “rebalancing” assets periodically. It also may mean selling a stock if its price relative to earnings gets drastically out of line with its historical trend.
Just ask Enron Corp. employees or big holders of almost any dot-com stock. Many of them failed to set and follow standards that could have saved them from huge losses.
One simple investing standard is that no single stock should make up more than 10% of an investor’s portfolio, no matter how bright the company’s future may appear.
Following strict standards is tough--both as a parent and as an investor--because it almost always requires going against the crowd.
Gordon Phares, a former banker, says he once left his son in jail overnight for participating in a prank that got him arrested. When his son tried to make excuses--and complain that the other kids’ parents didn’t react as negatively--Phares left him for another night.
“We wanted him to understand that there are consequences to every action you take,” said Phares, who now works with San Luis Obispo financial planner Judith Martindale. “After that, he kept his nose very clean.”
Sticking to standards as a parent requires making the kids study, practice piano or wash their faces, even when it’s late, inconvenient or under protest.
“You’ve got to remind yourself that in the end, it’s not going to be good for me or my child to throw out the rules,” Hallock said.
The same applies to managing money. When keeping your standards means having to swim hardest against the tide--deciding to sell technology stocks during the mania of early 2000, for example--the likelihood also is highest that you’re making the right decision for the long run.
