Publication: Investor's Notebook
Waiting to Buy | |
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Investor's Insight - January 30, 2007
"A Digest of Investment Opinion From the
World's Leading Financial Advisers"
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WAITING TO BUY
by Scott Burns
Q: I'm a 64-year-old grandma who messed up bad. My money
was in the Vanguard 500 index fund, but in August every-
thing was going south. So I moved my money to a money
market account. Now stocks are doing well again, and I
have no idea how to get back into the Vanguard 500 with-
out losing a lot of money.
Also, in 2000 I sold my house and invested quite a bit
in stocks like Cisco Systems, CMGI, Motorola, Oracle,
etc. I'm still holding them, thinking that is the only
way to get my money back. I'm still $35,000 in the hole.
Any suggestions? -- B.H., Austin, Texas
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A: One of the most painful exercises an investor can do
is to compare the performance of an investment that has
been sold with the investment that replaced it. Often,
the sold investment will do better.
The basic idea of index investing is that you can't
guess which stocks to buy or whether the market is
going up or down. You can only be fairly certain that
you are likely to get a good return over a long period
of time.
I think you need to think about the decisions you made
differently. First, you did not lose money when you
sold your S&P 500 fund. You lost an opportunity to
make MORE money than you made in the money market fund.
Losing an opportunity isn't the same as losing money.
My suggestion: Buy the index fund again and pretend that
you are now living on a desert island, far removed from
our reliable sources of worry.
One of the best reasons to own index funds is that you
don't have to worry about the fate of individual com-
panies. The value of your stocks is their price today.
Not what you paid for them. Not what you hope they will
be worth tomorrow. Just their price today.
Every day we choose the horse we're going to ride. If
you choose individual horses, you'll have a lot of ex-
citing races and you'll lose a lot. If you own the track,
you'll enjoy all the races. And you have a really good
chance of making some money.
Q: I have a fair amount of cash waiting for a market
drop. I'm fascinated with the Couch Potato portfolio,
but should I continue to wait for a drop, or would you
advise investing in all, or some, of the funds now?
I'm comfortably retired. My husband has a substantial
portfolio, but I have a relatively small one that I en-
joy working with. I do not consider it "play money," by
the way. Is the Couch Potato suitable as is for invest-
ors in a higher income bracket? -- K.M., Franklin, Tenn.
A: Lots of people are waiting for the market to drop.
Unfortunately, waiting for the opportune time doesn't
work for most people. When the market does drop, they
will worry that it will go lower. So they'll wait some
more. Then the market will pop upward. They won't be-
lieve the rise is real. Later, they will kick them-
selves for not having invested at the bottom. So they
will wait for prices to drop again.
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Waiting for a big market low is a good way to avoid
"pulling the trigger" and making a commitment.
That's why I think we need to select an asset allocation
and invest. If it makes you feel better to invest over a
period of six to 12 months, then invest over a period of
six to 12 months.
Whatever you do, the only thing certain is that you will
worry. You will have misgivings regardless of what happens.
One of the reasons equity returns are higher than CD re-
turns, long term, is this uncertainty.
The basic Couch Potato portfolio is suitable for investors
who want to have minimal expenses and returns that are
superior to most of the managed competition. If domestic
equities return 10 percent to 11 percent (dividends and
price appreciation) and domestic fixed-income securities
return about 5 percent, your long-term return should be
close to 8 percent a year.
Year by year, however, there is a good chance that you
will lose money in some years and make a bundle in others.
You can discuss this issue or any other topic in the new
Investor's Insight forum. Check it out here...
Investor's Insight Forum
(Investor's Insight reflects the opinions of experts. It does
not recommend any specific investments, and no endorsement is
implied or should be inferred. For more information, contact
the individual firms cited).
COPYRIGHT 2006 UNIVERSAL PRESS SYNDICATE
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END OF INVESTOR'S INSIGHT
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