Friday, August 12, 2005

"Advice?" Here's better advice:




Andrew Pryor (publisher of Sound Mind Investing, "America's best-selling financial newsletter written from a biblical perspective") guest blogs at Evangelical Outpost on, well, investing, ostensibly, but it looks more like a plug for his site when you do the click-throughs.

What is there, and posted, looks more like standard bromides:

The right investing decision is one that is prudent under the circumstances. Does it pass the "common sense" test? How much of your investing capital can you afford to lose and still have a realistic chance of meeting your financial goals? The investments that offer higher potential returns also carry greater risks of loss. The right portfolio for you is not always the one with the most profit potential.

For example, it's usually best not to have a majority of your investments in a single asset or security. For that reason, people who have large holdings of stock in the company they work for often sell some of it in order to diversify. If the stock doubles after they sell it, does that mean they did the "wrong" thing? No, they did the right thing. After all, the stock could have fallen dramatically as well as risen (ask the former employees of Enron). What would a large loss have done to their retirement planning? The right investment step is the one that protects you in the event of life's occasional worst-case scenarios. Generally, this moves you in the direction of increased diversification.


So, while I'm all in favor of diversification, I also think it's suicidal to be brain dead for the "long term."

So here's my observations and advice for diversification:




What does that mean for diversification?
For the "near term," (about the next 6 months to a year):


  • In general, with the exception of energy, forget US large caps, the Dow and the S&P 500, except as a hedge against increasing oil prices. They go up when oil goes down and vice versa.

  • For the long term, it's a good idea to hold at least some ETFs in oil related fields.

  • It's a good idea to have funds in the Asia and emerging markets region. It's also good to diversify within this market: some funds do significantly better than others.

  • Some money in ultrashort bonds is good. So is some money in unhedged foreign currency bonds or bond funds to hedge against a drop in the dollar.

  • Research, research, research.

  • Buy lower than you sell. (A bromide, to be sure, but often forgotten. Nobody ever went broke taking a profit.)




At least in the past year (longer, if I checked) this has returned well over the return on the DOW, the return on the S&P 500, etc.


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