By DAVID MOON, Moon Capital Management, LLC
January 1, 2012
The beginning of the year is a time that people evaluate a lot of things, including their investments.
If you are like most people, you spend way too much time looking backward, rather than forward. You celebrate your investment successes, but more dangerously, you fixate on your losses.
Any time you spend focused on the money you have lost is time you could have spent thinking about the money you still have.
That is not to suggest that an unprofitable investment is not an opportunity for an education – sometimes an expensive one. But get the lesson and move on.
Too often, someone will have $7,000 remaining from an original investment of $10,000 – and their sole focus is the missing $3,000 – not the remaining $7,000. They lament what they might have done a year ago rather than what makes most sense today. Coulda’, woulda’, shoulda’. It doesn’t matter if you didn’t buy bond funds a year ago. The question is, “What, if anything, will you do this week?”
The answer for many people is to simply take the most recent past and extrapolate it into the future. The past does not equal the future. If it did, librarians, as Warren Buffett notes, would be the richest people.
In 2010, the top performing diversified equity mutual fund was the Morgan Stanley Focus Growth fund. This year it is in the bottom ten percent of its Morningstar category. Precious metals funds increased an average of 41 percent in 2010. They declined more than eight percent in 2011.
Small company funds, the second best performing category in 2010 (25.80 percent), declined an average of four percent in 2011.
You cannot drive down a road while staring in the rear view mirror – especially when traffic is moving swiftly in both directions, with unpredictable cross traffic and lots of stop speed traps.
And you certainly can’t drive a car with your foot on the gas pedal – and only intermittently looking at the rear view mirror every January.
You must either pay constant attention to where you are headed, hire someone to drive or ride public transportation.
For most 401(k) investors, the investment review process should be fairly simple. Based on your personal situation, you develop an asset allocation. It should be based on the number of years until you retire and your personal tolerance for risk.
Most people should pick a maximum of three stock funds to fill the equity portion of their portfolio. Two fixed income funds are enough to cover the bonds. If you are very close to retirement, you might want a money market fund or something similar to it.
If you use index funds, you can reduce those five or six funds to two or three.
Then don’t do much at all, if anything. As long as your goals and fund choices don’t change, the most you may typically need to do is rebalance your portfolio to correct your asset allocation. And that has the effect of selling investments after they’ve done well – not chasing last year’s winners.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).