January 21, 2010
I don't have a crystal ball. And if I did I'm not sure I would know how to use it. It seems like having a crystal ball would come in handy to figure out what investments to choose in your 401(k) or 403(b). You look at a list of funds or go online and see a bunch of choices, maybe read about a few, look at the numbers, make your choice. Some folks ask for advice in choosing and we are always happy to consult. I frequently meet with clients seeking my advice and find that their account balance is invested like this: 5% This Fund, 20% That Fund, 15% Other Fund, 40% Big Fund, 20% Obscure Fund. Many investment gurus will use their crystal ball to tell you what percent to put in any given fund. Unless no one really has a crystal ball. How then do the gurus come up with their percentages? Beats me. Since there is no way to know which fund will do best, why fuss over 11% here and 23% there?
Think about this: when you get your statement what's the main thing you want to know? It's this: How am I doing? That's what everyone wants to know. When your assets are split into many odd pieces, how can you figure it out? And do you really want to spend the time trying? My advice: keep it simple. When investing in your retirement plan choose just 4 funds and put 25% in each. Then whenever you get a statement you will know how you're doing. You'll know which of your funds is the best, which is the worst, and by how much. Decision making will be much easier - no calculator needed, no guessing whether you should have 17% in this or 42% in that. You can rebalance once a year, getting the 25% each back in line. Meanwhile, if you can get a crystal ball, go ahead and use it. But for my money, a fixed percentage is better than a crystal ball.
Tomorrow: Ground Rule #7: Keeping It Simple
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).