7 Rules of Investing.
In times of uncertainty, it helps to go back to the basics. Rather than hope and pray that things go well – that our wealth is growing but also protected from losses – it’s a better idea to do a quick checkup to make sure that we are adhering to time-proven wealth strategies. Even if someone else is tasked with managing our money, it will be our gain (woohoo!) or loss (ouch), if the plan isn’t properly protected. Most managed plans do whatever the market does, while a properly diversified plan earns gains in bull markets and protects us from losses in bear markets and recessions. That’s why it’s important for us to be the boss of our money, and seek out an unbiased 2nd opinion on our current plan from someone who understands Modern Portfolio Theory. (All broker-salesmen say they know this, but few actually employ it.)
Below are two examples of people who had faith that their financial advisor was protecting and diversifying them, and telling them the truth about that, when in fact they had a great deal to lose.
E had suffered a lot of losses during the Great Recession, both in stocks and in real estate. She told her financial advisor that she wanted a conservative allocation. Her broker-salesman put her into dividend-paying stocks. E was actually invested 87% in stocks, which is appropriate if you’re about 13 years old. E was close to retirement. In a downturn, she was vulnerable to losing half or more of her wealth.
F wanted to get income while also protecting his principal. His fiduciary financial advisor told him he was earning 5-7% income on his conservative investments. Yet his own statement reflected that he was really only earning 1.8%, when you factor in how much he had lost on the risky bonds that his broker purchased. Should he just hold the bonds to term, even though he had already lost tens of thousands in principal? Many of the bonds were very long-term, in addition to having low credit quality. As just one example, he had a junk bond that wouldn’t pay him back until 2074 (decades after he has died). In the meantime, it was losing a lot of money, with the potential of more principal losses on the horizon.
So, what are the basics of investing? Here are some of the things we will cover in this blog.
1. Always keep a percentage equal to our age safe.
2. Overweight safe if we are nervous or would like a more conservative plan.
4. Know what is safe in a world where bonds are losing more than stocks, and banks are failing.
5. Rebalance regularly.
6. When we wait for the headlines, we’re late.
7. Stick to our plan.
And here is more information on each point.
1. Always keep a percentage equal to our age safe.
As we get closer to retirement, we can’t afford to lose money. Buy and hold is built on the idea that over time we can make up any losses. However, using bull markets to earn back losses is really just riding a Wall Street rollercoaster. Whether we are young or old, losing a great deal of our wealth will lower our FICO score. It might make it difficult for us to pay our bills, or, in the worst case scenario, we might lose our home.
Protecting our principal from losses on an age-appropriate basis is an easy way to ensure a that our financial home is protected from any market downturn. The Dow Jones Industrial Average dropped -55% in the Great Recession (down to 6549) and took almost seven years to return to its Oct. 2007 highs. The NASDAQ Composite Index plunged -78% in the Dot Com Recession and took 15 years to crawl back to its March 2000 level.
2. Overweight safe if we are nervous, or would like a more conservative plan.
Those people who overweighted safe (as our sample pie charts and email notifications prompted them to do) earned gains in the Dot Com and the Great Recessions, when most people lost more than half of their wealth. The strategy also outperformed the bull markets in between. When we are worried about the economy, or are interested in a more conservative allocation, just overweight a little safe – act a little older than we are.
Stocks really are the best performers over time, as you can see it in the chart below. However, equities and equity funds can also be the most volatile, and typically suffer the greatest losses during bear markets. Most people don’t buy low because they can’t. They’ve lost too much money.
You might notice from the chart above that small companies perform better than large companies. As you can see in the chart below, the NASDAQ Composite Index (with more growth stocks) far outperformed the Dow Jones Industrial Average (with more value-oriented holdings) over the five-year period.
We can increase performance by making sure that we have value and growth, small, mid, and large caps, and four hot industries. Check out the sample pie chart below. If you would like to personalize your own sample pie chart, just click to access our free web app, or email info@NataliePace.com with FREE WEB APP in the subject line.
4. Know what is safe in a world where bonds are losing more than stocks and banks are failing.
The bank failures of March seem far away, however, all financial services companies remain at risk, which is why we continue to underweight banks and the financial industry in our sample pie charts. A lot of that has to do with the industry’s exposure to long-term bonds in vulnerable high-debt industries, with the greatest concern being commercial real estate. There are ways to earn a reasonable return that is pretty safe. It’s tricky, however. In short, we want to keep the credit worthiness high, and the duration short.
We’re going to be hosting a What’s Safe? Bond Master Class this Saturday, where we will be discussing FDIC, SIPC, MMFs, CDs, bonds, annuities and more. If you are interested in joining us, email email@example.com with Bond Master Class in the subject line.
5. Rebalance regularly.
Regular rebalancing is an important part of our wealth plan. Obsessively watching our portfolio is not a good idea. Neither is trying to time the markets. Once, twice, or three times a year rebalancing ensures that we are capturing gains and increasing our wealth, while protecting our investments from downturns. It is also a Buy Low, Sell High plan on autopilot.
6. When we wait for the headlines, we’re late.
One of the reasons why market timing doesn’t work is that most of us are waiting for the headlines as our prompt on what to do. However, as you can see in the chart below, the recession doesn’t get announced until close to the stock market bottom. So, if we wait for the recession announcement, we’ll actually be selling low. Conversely, when everyone is excited about all the gains in the market, we’re often very close to the market top. That is why regular rebalancing and proper diversification, while keeping the right amount safe from principal losses, works better than market timing, Buy & Hold or headlines.
7. Stick to our plan.
There is a lot of financial noise swirling around us all of the time. Marketing whizzes cloak themselves as financial geniuses, and then punch our emotions to a 10 in order to sell us the only thing that’s going to work when everything goes to hell in a handbasket (a product they are profiting from promoting, which can sometimes be a Pump and Dump Scheme). If we want to gamble on a meme or social media video, then consider doing so in one of our hot slices, or as an education allotment in our budget.
The crypto winter, the cannabis crash and the gold/silver doldrums have taught many of us to make sure that we’re not gambling or betting the farm on any one get-rich-quick scheme.
It’s important for us to take ownership of our wealth plan, and be the boss of our money. Learning the basics of life math can help us build a solid financial house that can protect our wealth from the volatility of stocks and the vulnerability of bonds, while also allowing us to keep compounding gains. There are, of course, a few tricks to the trade. For a complete money makeover, consider joining us at our New Year, New You Financial Freedom Retreat January 13-15th, 2024 online. Register by Halloween and you will receive the lowest price and a complimentary 50-minute private prosperity coaching session (value: $400). Email firstname.lastname@example.org to learn more and register now.
Chances are we’re still a little complacent, even if we are also a little worried. That’s because the markets have recovered 12.8% of last year’s -19.6% losses. Never confuse a bull market with wisdom! Wisdom and time-proven 21st Century strategies are the cure.
Many people, including educated men and women, often get into trouble when they neglect to follow simple and fundamental rules of the type provided [by Natalie]. This is why I recommend them with enthusiasm." Professor Gary S. Becker. Dr. Becker won the 1992 Nobel Prize in economics for his theories on human capital
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Natalie Wynne Pace is an Advocate for Sustainability Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money and the 2nd edition of Put Your Money Where Your Heart Is were released in 2021. Follow her on Instagram.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.