Bedrock Investing Principles

Five Bedrock Principles for Investors

The List:

1. Diversification is how you limit the risk of losses in an uncertain world.
2. Emotions: You are your own worst enemy. (You can be the best stock picker in the world, capable of finding tomorrow’s winning businesses before anyone else. But if you panic and sell during the next bear market, none of it will matter.)
3. Volatility: There is a price to pay: The price of admission to earn high long-term returns in stocks is a ceaseless torrent of unpredictable outcomes, senseless volatility and unexpected downturns. ... The reason stocks offer superior long-term returns is precisely because we can’t forecast what they will do in the short run.
4. Eschew High Fees: When in doubt, choose the investment with the lowest fee. As a group, investors’ profits always will equal the overall market’s returns minus all fees and expenses. Below-average fees, therefore, offer one of your best shots at earning above-average results.
5. Time: Time is the most powerful force in investing. ...Wealth grows exponentially—a little at first, then slightly more, and then in a hurry for those who stick around the longest.

Comments: Image source. My own comments:

• We started very late. I could blame circumstances but really the blame is upon me. 
• Kathee are I are not stupid but we really muddle through some of this. We are very good earners and good at being frugal (see earlier article). But investing: Some knowledge and some dumb luck. 
• We try to value invest with companies that we feel will make money long term. Examples: IBM, Wells Fargo, MMM, Apple. 
• We do not use a wealth advisor. We did for several years. Paying a W.A. 1% fees seems like a waste to me. 
• With regard to time and volatility: We don't have anything invested where we feel we would need to bail out if the market declined. We are in it for the long haul. 

Avoiding shattered nest eggs

Don’t Paint Nest Eggs in Company Colors

Excerpt:

“I used to think Enron was the poster child of what not to do with company stock,” said Mike Scarborough, president of an investment advisory firm based in Annapolis, Md., referring to the energy trading company whose collapse shattered the nest eggs of employees who held so many of its shares.

“But it may ultimately turn out to be Bear Stearns, because money and investing is their business — and it still turned out badly.”

To be sure, the situations of Bear Stearns and Enron are different in many ways. For starters, just in terms of company stock, top executives at Enron encouraged workers to load up their 401(k)’s with company shares. That wasn’t the case with Bear.

Nevertheless, the rapid collapse of the investment bank’s shares — they fell to about $10 from $70 in around three weeks — offers yet another reminder of the risks associated with making concentrated bets on your employer’s stock, even if it appears to be a blue-chip investment.

Conventional wisdom says company stock isn’t that big a problem now. Thanks to the bear market and blow-ups at companies like Enron and WorldCom at the start of the decade, as well as the Pension Protection Act of 2006, retirement investors aren’t as concentrated in company stock as they once were.

In general, the numbers bear this out. In 2001, when Enron filed for bankruptcy, investors in 401(k) plans that offered company stock held 28 percent of their retirement account in employer shares, on average, according to Hewitt Associates, the employee benefit research firm. By the end of last year, that figure had dropped to 16 percent.

But many financial planners say 16 percent is still way too much to invest in a single stock, let alone that of your own employer. Think about it: $100,000 invested in the Standard & Poor’s 500-stock index would have shrunk to $90,760 since January. But had a Bear Stearns employee invested 16 percent of his money in company stock — with the remainder going into the S.& P. 500 — his account would have fallen to below $78,300. This at a time when his job may be in jeopardy.

Mr. Scarborough, whose firm advises workers on managing their 401(k)’s, recommends investing no more than 5 percent in employer stock. This is especially true for employees of a large company whose stock is widely held, because they may already own some of its stock indirectly. “A lot of diversified mutual funds in their 401(k)’s probably own those shares,” he said.


Comment: Many 401K programs match the employee contribution with company stock.