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By Adrian Mastracci
North Shore News
Business Section, "Loose Change"
Sunday, December 30, 2001
The year 2001 will be remembered as a tenacious bear market.
It is also well renowned for its persisting turbulence and plenty
of uncertainty. Investors, many still feeling its far-reaching effects,
are happy to see this chapter vanish into history.
Before closure is invoked, take a moment to reflect on your investment
experiences. Sit back, get comfortable and consider the question
"How short is your long-term
perspective?"
Investing is about setting a course to achieve a specific return
to meet personal long-term goals. Over time, however, many investors
become preoccupied with performance and instant gratification.
When this occurs, investment perspective is compromised, patience
becomes a scarce virtue and emotions drive investment decisions.
The events of 2001 proved this out.
The result is that investors can lose sight of the meaning of their
long-term investment perspective. This becomes an easy way for the
soup du jour school
of investment to take a firm grip of the portfolio.
First, consider these five investor habits of today:
- Investors devote too much time on the selection of every stock
and mutual fund.
- Investors devote too little time on the policies they ought
to follow to reach their personal goals.
- Investors embrace the euphoria of picking winning stocks and
mutual funds. The occasional investment home run is exciting,
but it's the losers that inflict serious portfolio damage.
- Investors often buy practically anything just to be invested.
The "RRSP season" provides solid evidence.
- Investors seldom build a house without a plan. However, many
of the same investors build their financial house without any
game plan.
Next, consider the 1990 Nobel Prize winning studies. They demonstrated
that long-term asset allocation policies have the greatest impact
on portfolios. Timing the markets and stock selections were not
even close.
“It's very clear.
Asset allocation ought to be
the focus of every investment portfolio.”
The studies found that asset allocation decisions explain, on average,
94% of the contribution to
total return. Contrast that with 2%
for timing the markets and 4%
for stock selections.
It's very clear. Asset allocation ought to be the focus of every
investment portfolio.
Five commitments pave the way to adopting the long-term perspective:
- Develop a written asset allocation plan consistent with your
personal goals.
- Have confidence in your chosen strategy.
- Discipline yourself to stay the course throughout the market
corrections.
- Have patience with your chosen strategy.
- Ignore the daily bombardment of conflicting research and expert
advice.
Every portfolio should be guided by a game plan that withstands
the tests of time. Investments can be risky when the investment
perspective is short.
An appropriate long-term investment perspective is a vision of
at least five years, often much longer. Therefore, it's important
to reflect on the meaning of long-term perspective as it relates
to the personal situation.
Understand the implications of your long-term investment perspective,
especially asset allocation decisions. It's essential for your marathon
of successful investing.
Best wishes and a prosperous 2002 to all.
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