2008 was a rough year for just about every investor. I’ve been telling folks that the single best thing do right now is to turn off your financial news channel or, at a minimum, accept it for what it is, which is a daily dose of infotainment that should not be taken as investment gospel.
So, with that in mind, my quick 10-step program for dealing with the next half-year or so:
Step #1: Turn off the boob tube and stop listening to the talking heads. They’re more interested in bumping up their media ratings points than providing solid investment advice.
Step #2: Make sure you’ve really diversified your portfolio, with big slugs of both domestic and foreign equities. (See also: “7 Costly Mutual Fund Mistakes to Avoid.”)
Global Equity had a lousy beginning to 2008, but it could be the perfect core fund for someone who can’t afford a plethora of fund minimums yet wants both domestic and foreign shares. Already have lots of domestic funds? Try International Growth, and if you can handle the additional risk, add some Emerging Markets Index. (I’d use the ETF.)
Step #3: Don’t time the market.
You can’t sell out of the market before it goes down and get back in before it goes back up. Market-timing is a fool’s game. I can already tell that at least two clients of mine demanded they be sold out, only to watch the market move lower initially, then much higher than where they started. Neither has called to get back in, and I’m guessing it’s simple embarrassment. Not only will they have to pay taxes on the gains they cashed out, but now their actions are looking, well, silly.
Step #4: If you’ve got some cash, put it to work now, not when you’re assured the markets are going up and everything looks perfectly calm and safe. Remember that you were saving it for a rainy day? Well, it’s pouring on Wall Street.
Step #5: Reduce portfolio risk if you’re sleepless.
Not everyone is made of the sternest stuff. If you’ve been stressed by the market turmoil and lie awake worrying about it, then maybe it’s time to take some risk out of your portfolio permanently. To do that…
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…consider trimming stock funds and adding to your short-term bond or cash positions. I like Short-Term Investment-Grade. That said, don’t overdo it. You need to be able to handle some short-term pain if you’re going to earn good long-term gains. (See also: “Vanguard’s Secret 5 Funds.”)
Step #6: Sell your long-term bond funds as well as Inflation-Protected Securities and consider a high-yield fund like High-Yield Corporate.
Junk bonds may have further to fall, but you’ll never call the bottom, and this could be a good time to begin building a stake here. Remember, however, the fund has a 1% back-end load in its first year, so if you’re not committed to holding on, you might want to consider a high-yield ETF, if you can find a good one.
Step #7: Make sure you aren’t overweighting small-cap stocks.
The best values right now appear to be in the large-cap and mid-cap arenas. I’m partial to the PRIMECAP Management team. If you can add to positions in their Vanguard funds, or better yet, can buy shares in their PRIMECAP Odyssey funds, do so. I’ve added to my personal holdings three or four times already this year. Also, a fund like Dividend Growth gives you exposure to big U.S. companies with strong balance sheets.
Step #8: Turn a skeptical eye toward the new Managed Payout funds that Vanguard is introducing.
Vanguard isn’t telling just who’s pulling the strings on these actively managed asset allocation funds, and that’s just wrong. How are you and I to know whether the “investment committee” that is running these funds has any expertise at all in active asset allocation? Remember, Vanguard’s an index shop, and these are not index funds. (See also: “ETFs vs. Index Funds: What You Need to Know Before You Invest.”)
Step #9: Don’t measure your portfolio performance from its absolute high.
This is the error more investors make than just about any other. If you’d known it was going to be the absolute high on that day you’d have sold out, right? Markets go up and down. Look at how you’ve done relative to a benchmark like Total Stock Market or, if you’re really conservative, Balanced Index. If your long-term performance has been solid, stick with your strategy.
Step #10: Stop and smell the roses.
Subscribers to my Independent Adviser for Vanguard Investors have invested in some of the best actively managed and indexed funds at Vanguard and done well. We’ve handily outperformed the market and done so with less risk. Having a lousy month or quarter? So what? Investing is a marathon. Leave the sprinting to those hedge funds that seem to be blowing up daily. We’re doing just fine.
After the year investors had in 2008, I know it’s tempting to just ignore your investments all together. But I’m begging you — please don’t bury your head in the sand! The ten steps listed above will help you find your balance and figure out what you should do with your money instead of pretending you don’t have a portfolio.
Lost in the tumult and volatility of the 2008 financial meltdown was the fact that Vanguard made a number of intriguing changes — from the very top of the company to individual fund managers to the addition of new funds — which should put investors like you in a strong position for 2009. Find out what’s new at Vanguard and how it can benefit you in Dan Wiener’s exclusive new report: “What’s in Store for Vanguard Investors.” Click here to read your FREE copy online now.
