Many years ago, a photograph of me appeared in The Boston Globe above the caption: “Jonathan Pond advocates dullness and passivity.” An acquaintance called my wife and read the caption, to which she responded, “Why is he telling the newspaper reporter about our love life?” Actually, I was warning about investors constantly buying and selling their investment holdings in the vain attempt to latch onto the next hot stock or market- leading mutual fund.
As mentioned above, diversification was discredited in the late 1990s when technology stocks were so hot that every other category of stocks paled in comparison. But the 1990s were followed by a big three- year downdraft (to put it mildly) that impaled technology stocks. Suddenly, investment diversification was back in vogue. But it had always been in vogue, because it was a lack of diversification that got all those tech- stock zealots in trouble. Diversification—in other words, spreading your money among several types of investments—accomplishes two crucial objectives:
- You’ll always have at least some of your money in investment areas that are thriving, and you’ll never have too much money in an area that’s diving.
- Diversifying among various categories reduces overall investment risk while increasing investment returns. Lower risk with higher returns sounds too good to be true, but it is true.
There is a small price to pay for diversification. Because your money has been sown in many pastures, your investment returns are bound to underperform the leading performance benchmark—the one that gets all of the media attention. But you’ll sleep like a rock.
©2006 Jonathan D. Pond. Reprinted with permission from HarperCollins Publishers
I will be live as this month's Ask The Author Wednesday, December 20th from 2-4pm, and will answer your money questions. Leave a comment below and be sure to join me on the 20th.
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Comments: 4
Thanks for the article. I just graduated from college and wanted to know when is a good time to start investing? For someone who is fresh into the "real world", do you have any advice about smart investments that do not carry a lot of risk? Thanks!
I'm going to chime in ....
The answer is, yesterday! But how?
You don't want to repeat the mistakes of the past that someone else learned. So, what do you do?
Rely on the people who run mutual funds, they take a fee for doing that. However, some funds cost WAY less than others.
What are you going to do for work? While your doing it, combine it with a way to learn about who is investing in your field and why. Work for a not for profit? Well, say your hospital, they are buying equipment from someone, or they are purchasing medicine from or through someone.
In the mean time, remain a generalist. Take a look at Vanguard mutual funds, compare them to others, say, TIAA-CREF, and then others who actively manage the money they invest, rather than just stick it in the general market. You will know when to use them later. [By the way, Vanguard gives a way great info for free on their web site.]
In the mean time, consider using mechanisms to defer your taxes. Short on cash, except for what your employer can offer? Invest via the tax deferred accounts on the job. No such thing at the job? Keep in mind that you may want to use this mechanism when next looking for an employer. In the meantime, look at IRA's, and compare the traditional IRA with the Roth IRA. Read about the difference. Check out the books at the library before buying one that suits your needs.
Don't forget the comments about diversifying. A young person will want to use retirement money much later than someone wanting to retire next year, so can stand the risk of going through more business cycles. However, you may want to get married, have children, buy a house, provide for the education of the children, so there may be a special time frame for that money.
Don't forget to use insurance as a mechanism, too ... you should find someone who can explain to you the different tools that are sold ... and I mean sold, since there are commissions involved .... Do you belong to a fraternal organization that offers insurance? Ask there, maybe there is less selling pressure.
Be sure to hook up with a tax advisor and financial planner, get the info from the horse's mouth when it means saving or making money. You should be able to save more or make more than you are paying them.
Check out www.fool.com. They do a good job of educating an investor.