A Wise Investment Plan
Now more than ever you need to figure out how much risk you can handle and create a well-diversified portfolio. Here are one expert's tips.
You're probably shellshocked from the investment bombs that have exploded all around you. Now more than ever, you need to develop and stick to a carefully thought out investment plan.
Don't have one? Take some advice from Larry Swedroe, director of research for St. Louis-based Buckingham Asset Management, and author of several useful investing books, including The Successful Investor Today and The Only Guide to a Winning Investment Strategy You'll Ever Need.
Swedroe first notes how few investors even have a plan. "You wouldn't start a business without a business plan, but many or most investors jump in without any investment plan," he says.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
You're best off mapping out a customized plan with an investment adviser, but you can get a head start with some suggestions from Swedroe. First, he says, focus on asset allocation, not stock-fund or mutual fund selection because asset allocation drives the bulk of returns. (Swedroe is also a strong proponent of investing in broadly diversified passive index funds.)
When it comes to taking risks in investing, he suggests thinking in terms of a three-legged stool: ability, willingness and need. Your ability to take risks, for example, may depend on your employment, or "labor capital," as he calls it. A worker with little employment risk and a stable income, such as a tenured professor or a police officer, can afford to take more investment risks. A young worker with a long investment horizon can also take more risks. In any case, Swedroe says you should invest in the stock market only money you can commit for at least three to five years.
Willingness to take risks depends on the person. Ask yourself if you'll pass the sleep-well test in a bear market, he suggests. "Most people are overconfident in their ability to take risks," he notes. You want to make investment decisions with your head, not your stomach, he explains.
Here's what Swedroe says about the need to take risks: "The very people with the most ability to take risks -- the rich -- have very little need." Sadly, many people with high net worths took more risk than necessary by investing heavily in the stock market prior to the bear market, he notes.
When constructing portfolios, Swedroe layers on some personal preferences to modern portfolio theory, which teaches that high, risk-adjusted returns are likeliest to be achieved with a well-diversified basket of low-correlating assets.
In stocks, Swedroe recommends holding a globally diversified portfolio with at least 20% to 40% in international stocks. He likes to put a healthy dose of emerging-markets and small-company international stocks in his clients' international portfolios because these two classes have relatively high expected returns and particularly low correlations with U.S. stocks. Stocks, of course, have been a disaster the past 13 months, but Swedroe notes that based on history, the returns over the next ten years should be quite rewarding because of today's low valuations.
In normal times, and especially today, Swedroe doesn't like to take risks in bonds. He sees them as a dampener of portfolio volatility, enabling investors to stay the long-term course in volatile stocks. "You need high-quality, fixed-income investments so that you don't panic and sell stocks," he says. Thus, he shuns high-yield bonds (which tend to follow the up-and-down swings of stocks) and prefers bonds with maturities of three years or fewer, which have lower volatility and less correlation to stocks. The best diversifiers, he believes, are high-quality bonds such as Treasuries, Treasury inflation-protected securities and triple-A-rated municipals.
Here's some parting advice from Swedroe: Educate yourself about investing and personal finance. "Most Americans would much rather spend time watching a reality show or soap opera on TV than five or six hours reading a high-quality book," he says. Swedroe's books are accessible and practical, and he recently published a new volume, The Only Guide to Alternative Investments You'll Ever Need. To help draw up an investment policy statement for yourself, we also highly recommend Charles Ellis's Winning the Loser's Game.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Andrew Tanzer is an editorial consultant and investment writer. After working as a journalist for 25 years at magazines that included Forbes and Kiplinger’s Personal Finance, he served as a senior research analyst and investment writer at a leading New York-based financial advisor. Andrew currently writes for several large hedge and mutual funds, private wealth advisors, and a major bank. He earned a BA in East Asian Studies from Wesleyan University, an MS in Journalism from the Columbia Graduate School of Journalism, and holds both CFA and CFP® designations.
-
Astronomical AI Spending Is Causing Jitters on Wall Street
The Kiplinger Letter Amid rampant excitement over artificial intelligence, a new round of skepticism is taking hold. Here are four forecasts about the future of generative AI.
By John Miley Published
-
Protect Your Loved Ones With an Estate Plan
Here are eight things you can do to help protect your family.
By Mario Hernandez Published
-
Stock Market Today: Dow Outperforms After IBM Earnings
Investors also parsed a strong reading on second-quarter GDP and a dismal decline in durable goods.
By Karee Venema Published
-
Stock Market Today: Stocks Tumble on Disappointing Big Tech Earnings
Poorly received quarterly results from Alphabet and Tesla sparked a steep selloff in equities.
By Dan Burrows Last updated
-
Stock Market Today: Mega-Cap Tech Rallies to Drag Markets Higher
Markets focused on upcoming earnings from Magnificent 7 stocks rather than chaos in D.C.
By Dan Burrows Published
-
Stock Market Today: Stocks Tumble After Spectacular Global Internet Crash
Market participants rushed out of risk assets to end a wild week of trading.
By Dan Burrows Published
-
Stock Market Today: Dow Sinks 533 Points as Big Banks, Mega Caps Slump
Goldman Sachs and Apple were two of the worst-performing blue chip stocks on Thursday.
By Karee Venema Published
-
Stock Market Today: Semis Get Slammed and Blue Chips Bounce
The potential for more curbs on tech sales to China set off a rotation into blue chips.
By Dan Burrows Published
-
Stock Market Today: Dow Spikes 742 Points After UnitedHealth Earnings
The S&P 500 and Nasdaq also scored wins Tuesday albeit with much smaller gains than the blue chip Dow.
By Karee Venema Published
-
Stock Market Today: Dow Adds 210 Points as Apple, Goldman Hit New Highs
A big rally in blue chips and some dovish Fed speak boosted the equities market Monday.
By Karee Venema Published