Anna Mate

Archive for February, 2010

There’s no doubt that putting together a diversified equity portfolio can be complicated and time-consuming. But after looking at literally thousands of portfolio combinations, the Schwab Center for Investment Research has come up with a strategy that can make this job a lot easier. This strategy, which Schwab calls Core & Explore, is designed both to reduce your risk of underperforming the market and to provide you with the potential to beat the market—all within the context of your own time frame and tolerance for risk.
Central to Core & Explore is diversification. If this remains confusing, just think in terms of a balanced diet. To maintain good health, you should have a wide range of nutrition, including protein, vegetables, fruits, and grains.
Let’s stay with that metaphor for just a minute. Your well- rounded selection of foods (read: stocks) represents the Core of your stock portfolio—or a wide range of U.S. companies. When one sector or stock category drops, which it will inevitably do at some point, it represents only a fraction of your holdings, so you don’t take an overwhelming hit. Indeed, if more people had stayed diversified this way a couple of years ago, they wouldn’t have burned nearly as badly when the tech stock bubble burst. But who wants to eat just meat and potatoes, along with the odd vegetable? Once you’ve got your Core set up, you can add in the Explore aspect of your portfolio. (Think desserts and appetizers.) This is where you get the chance to try to outperform the market—perhaps by buying small-cap and international stocks, or by buying more of a particular company, sector, size, or style, or perhaps by investing in nontraditional asset classes such as REITs or hedge funds.
Ultimately, your goal is to have the Core and Explore portions of your portfolio work together to give you the greatest probability of achieving your goals. Let’s get started doing just that.

Investing, as experienced investors know, is a commitment not unlike the commitments we make in other areas of our lives, (Cs an endeavor that involves persistence and the determination to hang in there, for better or for worse, during good times and bad.
Realize, though, that the greatest danger in the stock market isn’t in what’s happening to the Dow or the Nasdaq; it’s in how you react So when things get intense, how do you hang in there for better or for worse? It is said that we learn from experience and that there is no greater teacher than adversity. I’ve hod more than forty years of investing experience and more than a few lessons in times of adversity. Here’s what I’ve gleaned from those lessons and how to invest “for keeps”:
I. Keep your emotions in check When it comes to investing your emotions can be your downfall. If you let them take over you can get into real trouble. For example, panicking can cause you to sell an investment at its low. If during a down market you do some research and conclude that it’s time to rebalance or to sell a less- than-sterling investment that’s different But selling out of panic is usually a mistake. Remember that in these rocky times your gut is probably working against you.
The good news is that experience teaches you to handle those emotions. Experience deepens your understanding of the market’s ups and downs and helps you to appreciate the value of basics such as diversification and asset allocation. Experience has taught me that it can even be wise to counter your emotions. Sometimes when I’m feeling a lithe anxious, I go against that fear—and I invest.
2. Keep your perspective. Perspective—by which I mean keeping a long-term view of the market’s ups and downs—may be an investor’s best friend. Once you’ve been an active investor for a significant period of time, a bear market probably isn’t a new experience. You may even have expected it which makes weathering the storm a lithe easier When you’re right in the middle of a down market you can feel as though it’s the worst one since I 929.At times like that it can be very helpful to look at the big picture. A down market is a down market; that tough bear market we experienced from 2000 to 2002
was not that different from the one we saw in 1973—74 or 1987.
3. Keep the faith, Keeping your emotions in check and keeping your perspective are two legs of a three-legged stool. The third and equally important leg is keeping the faith, by which I mean staying confident in the American economy We live in a country of 285 million people and $10 trillion in gross domestic product with a capitalization of $25 trillion. Those huge numbers are signs of a thriving economy When we say we’re having a bad time, that means our growth rate is going sideways, or maybe it’s down a small amount in a recession. Even though our growth is cyclical, it is mast definitely growth. In a down market, confidence in these facts can help get you through and allow you to overcome the temptation to act on your fear.

As you and your family begin to plan your investment portfolio, first think about your time frame. Take a few minutes to jot down the various goals you have discussed and when you want to realize them. Your list might include retirement, college, supporting your parents, a new home, a vacation retreat, volunteer work, a year abroad—whatever, If you haven’t yet discussed your short- and long-term goals, this is the time to do so. Next, think about your tolerance for risk. My advice? Don’t be hasty here. Assuming that you’re an investor for the long term, you need to think carefully about how much volatility you can live with. That’s the only way to stay the course through the stock market’s ups and downs. Otherwise, if you’ve exposed yourself to too much risk and your portfolio drops precipitously, you are more likely to panic and sell at a time when the stock is low. One of the best ways to determine how much risk is appropriate for you is to talk it out— with your spouse or significant others.
Once you’ve had these discussions, fill out the questionnaire in Figure 3.1, which asks specific questions about your time frame, investing knowledge, and tolerance for risk. You might want to have your partner fill out the questionnaire as well—comparing notes may turn up some interesting insights!