By Raymond D. Mignone
In 2004 the Dow Jones Industrial Average gained 3.15 percent, the S&P 500 gained 8.99 percent and the 10-year treasury bond ended about the same as it started the year, yielding approximately 4.25 percent. But most well balanced portfolios had better returns. Why?Depending on how the portfolio was positioned in 2004 (how aggressive or conservative) returns should have been obtained between 5 percent and 11 percent after all expenses. A big part of 2004 portfolio returns came from small stocks and international stocks and bonds. These asset classes had 20 percent plus gains last year boosting overall returns.With interest rates still low, very conservative bond and CD portfolios are unlikely to provide a return good enough to maintain most retirees lifestyles above inflation in the years to come. You must be willing to accept some intelligent risk and have good investment discipline (easier said than done).This is the time of the year when Wall Street digs up all of the so called “market gurus” to tell us how to best invest our money. Let's look at some of the indicators we are supposed to invest our life savings by: Second term of a president indicator; years ending in five indicator; Super Bowl indicator; how January goes is how the entire year will end, etc.Forget all of that nonsense and don't waste your time listening. No one knows what the market will do.In looking back on two good years in a row, it is worth remembering back to early 2003 when a decent year for the markets seemed to be wishful thinking. At that time, we were coming out of the most dismal year of the three-year bear market, and sentiment was extremely poor.Stocks continued to decline ahead of the Iraq invasion, the economic recovery had yet to gain traction, fears of deflation were starting to take root and terrorism risk was on the front of investors' minds. At the time the emotional reaction was to get defensive. But the rational reaction was to look at valuations and recognize that the market was already pricing in what seemed to be an unreasonably high level of risk.Anyone who stuck with a valuation discipline and maintained a decent exposure to stocks in a well-balanced portfolio was well rewarded with the S&P 500 gaining almost 52 percent since it bottomed on March 11, 2003.Smart investing requires first understanding your overall financial situation. This usually requires some form of financial planning to allow you to determine what your future needs are.Next, you need to do a self-analysis to understand your risk tolerance level. This will be required to properly allocate your investments between stocks and bonds. While many financial advisors use questionnaires to determine your risk tolerance, I have found people answer questions one way in the calm of an office meeting and react differently during a bear market. Review how you handled the bear market of 2001 and 2002. This will provide good insight into your investment psychology.Lastly, you should determine your overall asset allocation and create a portfolio of bonds, alternative investments, U.S. large and small stocks as well as international large and small stocks. The selection of investments for your overall asset allocation is where one could add a lot of extra value if you know what you are doing.If you haven't had good results in the past maybe you should consider working with a professional or some of the prepackaged lifecycle or asset allocation funds offered by firms such as Vanguard or Fidelity. But please, whatever you do, don't listen to the market gurus or follow any of the nonsense indications you read in the financial magazines. Stay disciplined and stick with your allocation and you will do well over time.Raymond D. Mignone is a fee-only certified financial planner and registered investment advisor specializing in retirement planning and portfolio management. He can be reached in Little Neck for a no obligation consultation at 718-229-2514. Or, visit www.RayMignone.com.
