Can you think back far enough and remember the late 1990s from an investment perspective? The technology sector was going crazy; we kept hearing of this “new normal” where it was more important, it seemed, to lose money than it was to show earnings. Many of the big-name tech stocks were skyrocketing in value with seemingly no end in sight.
The mistake people made was not so much believing in this fairytale as it was not getting back to investment basics. In the early 1990s, you may have started out with growth or technology funds that represented maybe 25% to 35% of your portfolio. By the end of the 1990s, the monies in this sector, due to extraordinary growth, had risen to 60%, 70% or even 80% of your portfolio.
In essence, we fell in love with the technology sector and forgot about the investment basics, which indicated that at some point you needed to rebalance. The investment portfolios that you had were so out of balance as a result of the extraordinary growth of the technology sector that you put yourself in harm’s way. The assumption here is that we actually had an investment policy statement to go by.
An investment policy statement (IPS) would outline an appropriate balancing process for the portfolio. This is important because, as sectors rise and fall, you need to buy or sell various sectors to bring the overall portfolio back to proper balance. At some point, as the technology/growth sectors started to represent over 50% of your portfolio, a systematic approach to selling would have been indicated by the IPS. If you had the proper parameters and the discipline to make the necessary changes as you became out of balance over time, you would have saved yourself and your portfolio the degree of loss many suffered. Certainly, there are no guarantees for any future or past performance.
In secular bear markets, like the one we’re in right now, it is more important than ever to have a proper IPS in place. Due to the volatility of these markets, it is imperative to have the guidelines necessary to know how your investments should be situated, and how to make the necessary adjustments when the markets change swiftly, which is what we are experiencing currently.
It is not unusual, as I talk with people, to hear them tell of their mistakes of buying high and selling low. They usually chuckle when they think of how they go about the investment process. The interesting thing is that if you had systematic changes programmed into your investment portfolio, the process of buying high and selling low could be avoided because you would be taking the emotions, or panic, out of your investment decisions.
It is important not to fall in love with your investments. Do the research necessary to bring in place the proper asset allocation and weightings necessary to accomplish your retirement objectives, and then go out and find very good managers who fit into your investment approach.
About Mark Singer
Mark Singer is a CERTIFIED FINANCIAL PLANNER™ professional and the author of The Changing Landscape of Retirement–What You Don't Know Could Hurt You. He has been The Retirement Guide to thousands of investors for close to 25 years and is the creator of the Retirement Roadmap and the Financial Organizer System, both of which contribute to a solution to investors' greatest concerns–properly coordinating their financial affairs. These systems have become a primary resource for the people who have worked with Mark over the years. You can download the first chapter of Mark's new book for free by Liking it on Facebook.
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