“Let me tell you, I’m not sure if America runs on donuts, but I sure do! Nothin’ like a little simple sugar icing to get the blood pumping at 9 a.m.” – Chris Benz
I think the trend to eat healthy has reached Hanukkah. How is that possible, you may ask? With all the fried foods, sugar and high caloric intake, how can I say that Hanukkah is becoming a holiday focused on eating healthy foods? It’s because I enjoyed multiple sufganiyot with wild-berry filling, glazed in the same berry sauce topped with a grape. A real grape, nothing artificial. What’s going to be next, red-pepper or carrot topped sufganiyot?
Aside from healthy eating, Hanukkah has produced tremendous wealth for the lucky few who have made a small fortune playing dreidel. I have been inundated with phone calls this week with people looking to invest their riches. Well, that may not be true, but whether you clean up playing dreidel (and I am not talking about chocolate coins) or you have generous in-laws intent on stuffing your pockets with cash, the question is what to do with the newfound bonanza. Should you use it to buy the latest electronic gadget that you just can’t do without? Or, is there a better approach that will help your financial situation in the long run? Here are some tips that will help you become a better investor.
Allocation
Perhaps the single-most important aspect in growing wealth, beyond winning at dreidel, is to allocate your portfolio correctly. This means having the correct mix of stocks and bonds. Your stock portfolio should have large companies and small, representing growth and value. Your bond portfolio should have US and non-US dollar bonds as well as a small percentage of high-yield and emerging-market bonds. This will help create a portfolio with lower volatility, and the smoother ride can even potentially help increase returns as the portfolio can compound at a greater rate if there are no huge drops. Most research indicates that asset allocation decisions contribute around 90% of overall investment returns.
Rebalance
Buy low and sell high. That is the holy grail of investing. All too often I see portfolios that haven’t been touched in years. Earlier this week I met with a prospect. She hadn’t touched her portfolio since 2003, before she immigrated to Israel. That’s almost 20 years. What was an appropriate investment allocation for a 40-year-old is going to be different for someone who is in their 60s. Additionally, due to market movements, your allocation may be way too aggressive or too conservative than you originally wanted. A yearly re-balance solves this issue. You end up selling assets that have increased in value and buy more of those that are trading at lower levels. You get your stock/bond allocation back to the level that is right for you.
Goals-based investing
There is a lot of noise in the financial media about the need for investors to “beat the market,” pushing investors to strive to somehow get better returns than could be had by just tracking the market. This sounds all well and good if we were living in a vacuum and if the entire point of investing was to make as much money as possible.
Unfortunately for many of us, there is a point to investing. That is to make enough money to help achieve our goals of marrying off children or paying for our retirement, just to name a few. This is called “goals-based investin.”
Canaccord Genuity Wealth Management has a piece explaining why a goals-based approach benefits investors. They write, “Goals-based investing shifts the focus away from the markets and back to the individual investor. For those who use this approach, the objective is not to generate superior returns or beat an index over the short term, but instead to manage investments to achieve measurable goals over the longer term.
This doesn’t mean directing all emphasis away from market or investment performance, but it does help individuals to look beyond what may be happening in the markets in the short term and instead consider a broader view over multiple time horizons.”
They continue, “It can also help to instill discipline and foster better investment decision making. Investment decisions are now focused on achieving certain goals alongside the individual’s personal risk tolerance, rather than based on what is happening within the markets over a short period of time.
“As investors, the biases that can influence poor investment decision-making can more commonly emerge in periods of short-term uncertainty, especially during times in which the markets are volatile. A focus on longer-term investment objectives, instead of short-term market performance, has been shown to help investors make better decisions by tempering these biases.”
Happy Hanukkah and good luck spinning that Gimmel!
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill). Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il