Focus on What You CAN Influence When Investing

Here's a very interesting piece from the Wall Street Journal that says investors need to focus on the aspects of investing that they can control (which is not return rate, BTW). A summary:

The biggest factor in long-term returns is how the financial markets happen to perform during the 30 or so years an investor puts money away for retirement.

The bigger issue is that if your career coincides with a relatively flat period for the markets, there's going to be a natural limit on how much you can hope to reap from your investments. After all, study after study has found that over long periods, very few funds outperform the market.

It's a sobering thought. If so much of your fate as an investor is out of your hands, what can you do? Focus on the things you can influence, says Fran Kinniry, head of Vanguard Group's investment strategy group.

And that means going back to some of the traditional advice about investing for retirement: Start saving as early as possible, save as much as possible, diversify and pick low-cost investment options.

As I'm sure you've guessed, I love this piece. ;-)

A few comments:

• Old Limey, a successful investor who reads FMF and is well-known in the comments section, often admits that much of his investing success was due to WHEN he was investing (in the run-up due to the internet bubble.) He had a big wave to ride.
• As I've said on numerous occasions, time is the most important factor that determines how your investments perform.  
• "Study after study has found that over long periods, very few funds outperform the market." That's the beauty of index funds -- they do beat most other funds over time because of low investment costs. That's why I invest with them.
• "Start saving as early as possible, save as much as possible." Wish I'd said this. Oh, I did. ;-)

How about you? What's your investment strategy?

Comments

[TJ]

My rule to financial happiness is to save half of your after tax income. Even without a soaring market you'll soon find yourself forced with a decision to make: retire extremely early, spend more or give more.

And this doesnt take an extremely high income to pull off. Its been discussed before on this blog that the happiness sweetspot for family income is $40K year (dollars made/spent above that just dont lead to significant increase in happiness/comfort that dollars below that do). I'm not saying $80K is easy for every family to make, but not exactly hard for dual earners and a reachable goal for just about any single earner focused on building their career. Once you've reach that, no one says you still have to spend 85% of your income.

This has nothing to do with investment rate of return because, at least I've found for me, that is mostly a crap shoot.

[Rod Ferguson]

My investing strategies are simple:

1) Diversify. I balance domestic and international stocks, stocks and assets, currencies and instruments, pre-tax and post-tax.

2) Pay attention to market cycles and invest accordingly. We're at the bottom of the K-cycle now, so material things will be/are worth more than ephemeral things (commodities vs bonds, for example).

3) Pay attention to global fundamentals and invest accordingly. Back in 2005, I was suggesting to friends and co-workers that the housing wasn't sustainable based on the volume of real estate that was being moved compared to historical norms. I was told "this time it's different", "real estate will always be a good investment", "housing isn't in a bubble because Greenspan and Bernanke say it isn't" and other such things. But, I kept looking at the fundamentals and saying "this isn't sustainable". Fast forward a few years and I'm looking at the US economy, government and consumer debt and the derivatives market. I suggest to friends and co-workers that this as well isn't sustainable, based on the amount of debt load compared to historical norms. They say "we'll grow our way out of any problems", "debt doesn't mean we owe anyone anything - it's just a means to keep world peace", "derivatives are the best way to make money", etc. I kept looking at the fundamentals and saying "this isn't sustainable". We're still playing that one out, but it's looking like it isn't sustainable. So I invest in things that, historically, do well (or at least do not do poorly) like metals, land and agriculture.

And yes, FMF, I took the plunge and started in agribusiness. No farmland yet, but working towards it; right now it's all about potash :)

[Josh]

The one comment I would make is make sure your savings is really savings. It is funny to me that people put there savings in places where they can lose money, and if you have the ability to lose money than that is an investment, not savings...

[Crystal@BFS]

We bought after the big crashes and we buy dividend yielding stocks. We're actually up 18% overall now despite 2008-2009 simply since that is exactly when we funnelled in a ton of cash. I hope we do as well when the economy recovers, but in the meantime, we are finding the best deals we can and shoveling in more. :-)

[Anthony @ ETF Trading Strategies]

Totally agree that it is the long term horizon that counts, along with low fee investment vehicles. Demographic trends have benefited the baby boomers in the equity markets, and now we are entering a new tipping point phase in their demographic needs which will affect all of us during the next 20 years. Long run returns are dictated by asset category performance, not individual stocks, so make sure you have exposure to the right asset categories at the right time within a low cost investment vehicle like ETFs or Index funds.

[MBS]

I would say that with all the oil spils and falling u.s. dollar that maybe heating oil or commodities like that. Alternative energy sources would seem like the future investment that is good for all involved.

[Old Limey]

Currently 2/3 of our portfolio consists of muni bonds and CDs that I am holding to maturity, and that are yielding 4.93%. I bought them in October 2008 and have no intention of selling them. A large reason is that the CDs provide $61K of annual interest in our IRAs that is tax deferred and the bonds provide $132K of tax exempt annual interest in our trust account and the only management they require is the satisfying task of reinvesting the interest every month.
The other 1/3 of our portfolio is distributed between 5 mutual funds that are in different types of income producing securities, and they do require my active management. For example, last November several of them that held various types of government backed securities started to head down. Since my rule #1 is "Don't Lose Money" I got out of them them pretty fast.
I select my funds based upon their annual compound rate of return (APR) and their volatility. Three measures of volatility that I like are the Ulcer Index (UI) which measures downside volatility, the Ulcer Performance Index UPI) which measures risk adjusted return, and Maximum Drawdown MDD) which measures the worst possible drawdown in the time period being examined, in this example it is the last six months.

Fund# ......... APR ............. MDD .................. UPI .............. UI
1 ................. 17.15% ......... -0.5% ................. 102 ............ 0.14 -- Strategic income from varied sources
2 ................. 10.02% ......... -0.24% ................ 99 ............. 0.08 -- Limited Duration income sources
3 ................. 16.48% ......... -0.67% ................ 90 ............. 0.16 -- Floating rate bonds
4 ................... 9.45% .......... -0.5% .................. 90 ............. 0.08 -- Ultra short term income sources
5 ................. 30.10% ........ -1.37% .................. 60 ............. 0.46 -- Preferred stock in Real Estate Investment Trusts (Minimum investment $250K)
DJI ............. 30.17% ......... -6.66% ................. 13 ............. 2.09 -- 30 Dow Jones Industrial stocks

The last entry in the table is the Dow Jones Industrial Index. Notice that even though the Dow has an excellent return, its volatility and worst drawdown is huge and its risk adjusted return is low compared with the 5 funds that I own. Why I like low volatilty funds so much and place such an emphasis on volatility is that when they start turning downwards they give you some time to decide when they should be sold. High volatility funds do not give you that kind of time as well as giving you a very bumpy ride and, particularly when you have a large portfolio, creating a lot of stress. Avoiding high volatility and reducing risk has been an important factor in achieving investment success and peace of mind over the last 10 years. Tumultous bubbles are like riding a roller coaster, the only difference being that roller coasters give you the big thrill when they are going down, Bubbles do not, ride them down at your peril.

[Jacob @ My Personal Finance Journey]

I also am a big proponent of index funds. It enables you to control YOUR OWN EMOTIONS, which is one of the few things we as investors have control over when investing.