Okay, yesterday we discussed five kinds of difficult clients. If you view yourself as your own client, which type(s) are you – Fixed on Past; Scared; Resistant to Change; Over-reactor; or Attached to Cash?
Now, what do you, the financial advisor, do to get yourself to make a decision (buy or sell something)?
First, recognize it is not necessary to do something. You need to establish:
1. Specific buy or sell points for stocks you are uncertain about. You will, IFO fervently hopes, have some fail-safe stocks that you don’t intend to touch unless the CEO is caught swimming in the Tidal Basin in Wash DC as Wilbur Mills was those many years ago.
Your newer stocks or ones you are a bit uncertain about, you need to set price stops (from price falling) for the ones you’ve bought and personal buy signals from the ones you are watching. You ARE watching and considering buying one or two, aren’t you?
2. Write an investment policy statement. This was a recommendation by the financial advisors, but sounds a bit tedious to me. OTOH, IFO’s policy has been written out and stated fairly often – rising dividends, know the CEO, etc.
3. Remind yourself from time to time about the basics of investing that you have established for yourself. See #2 above.
4. Continuously review your current investments – no matter how stable or growing, but especially if declining. If declining, you may have to make some decisions and the hardest ones are to admit to yourself that the company you thought was so great… isn’t.
You can do this with your financial software (IFO prefers Quicken) and or on Yahoo’s personal finance site or your broker’s website, or all three.
5. Speaking of Yahoo’s personal finance site, it is a good idea to set up a model portfolio or two or three for yourself. You can also do this with the online Wall Street Journal, or, again, your broker’s website.
If you have a really good discount broker, s/he WILL NOT give you a single word of advice. You are strictly on your own! That’s a good thing. It will keep you on your toes and you’ll have no one to blame if you make a bad decision.
BTW, some financial advisors advise senior citizen investors to have a mix of about 60% stocks and 40% bonds. Some used to say the percentage of bonds should be your age and the percentage of stocks should be what is left. So, if you are 70 years old, they said, you should have 70% of your investments in bonds and 30% in stocks. Bullfeathers, we say!
You would have left an awful lot of money on the table if you had followed that advice during the past six years. And you could lose a lot if you suddenly start to buy bonds now.
That’s because there is something called “interest rate risk.” Government bond interest rates are so low now that they can hardly go any lower. With inflation around 2% you are already paying the government to hold your money.
But maybe you feel safer with govt bonds, which “are almost as good as cash.” Yes, but they aren’t. Unless you hold to maturity, if rates start to go back up, the amount you get for your bond when you sell it could well be LESS THAN what you paid for it. I’ll explain about that some other time.
We went a little long here. Will have to do another post on the more psychological aspects of your investing behavior.