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INVESTMENT STRATEGIES: AN INVESTOR'S PRIMER AND GUIDE
TO THE INVESTMENT STRATEGIES CONFERENCE MAY 22-23 |
COVER STORY

Picking Your Shots

Despite the ballooning amount of information available to investors, the ability to boil options down to a simple few may be the real secret to financial success.

May 11, 1999|PAUL J. LIM | TIMES STAFF WRITER

There comes a scene in countless old crime movies when the cop shouts to the barricaded criminal: "Listen buddy, we can do this the easy way, or we can do it the hard way!" At which point the criminal usually chooses the hard way, and gets gunned down.

For many individual investors today, the choice of an investment strategy also comes down to the easy way or the hard way.

You can make things easy on yourself by focusing on the few big decisions that really matter. In other words, you can pick your best shots.

Or you can take the complicated approach, expending--often wasting--energy on a slew of individually less important decisions.

It's what Vanguard Group founder John Bogle describes as the "clash of two cultures in investing: complexity and simplicity."

Not surprisingly, in an age when anyone can trade shares of Amazon.com via a home computer between hands of video poker, many people wittingly or unwittingly choose the hard way.

With more than 13,000 mutual funds to pick from, not to mention tens of thousands of stocks, bonds, options and derivatives--and with hundreds of magazines, infomercials, cable shows, Web sites and newsletters chiming in with advice--the pressure to do something is maddening.

"There is so much noise in the marketplace when it comes to investment advice, it's no wonder people are having difficulty blocking it out," said Robert Williams, who manages the Irvine office for St. Louis-based brokerage Edward Jones.

Granted, some of us over-complicate our portfolios because, like Vegas, it's fun.

For instance, no one put a gun to Ralph Stevens' head and told him he had to invest in 52 mutual funds. Admits the 67-year-old Tucson retiree, who has since pared his fund portfolio to 31: "It's like my hobby."

But most of us complicate our financial strategy because we mistakenly think we must. We assume that unless we listen to every bit of advice, every "whisper number" that pops up on the Internet--and act on it--our children won't have money for college. Or our mortgages won't get paid off. Or our retirement won't happen.

Yet there's just as good a chance--if not better--of accomplishing all those things by simplifying your strategy.

"My judgment and my long experience have persuaded me that complex investment strategies are, finally, doomed to failure," Bogle said in a recent speech. "Investment success, it turns out, lies in simplicity as basic as the virtues of thrift, independence of thought, financial discipline, realistic expectations and common sense."

Indeed, there are really only four portfolio decisions that are key. In order of descending importance, and simplicity, they are:

* Asset allocation, or determining what percentage of your portfolio will be in stocks versus bonds versus cash--and, within each asset class, what portion will be held in different styles of stocks and bonds (or stock funds and bond funds).

* Timing decisions to fine-tune your asset allocation strategy. For instance, if you think bonds will outperform stocks next year, you might decide to rebalance your portfolio slightly to reflect that belief.

* Mutual fund selection.

* Individual security selection.

"Each decision [in this list] takes on lesser importance" for your long-term returns, said Roger Ibbotson, finance professor at Yale University's School of Management.

And yet, the further down you go on this list, the more individual decisions you'll have to make. That's where the time-wasting can become extreme.

For instance, "your overall asset allocation decision probably won't change that much," notes Mark Riepe, director of the Schwab Center for Investment Research in San Francisco, a research arm of discount brokerage Charles Schwab.

"Once you set the policy in motion, you don't need to be looking at it every single day" or month or quarter, or even year, he said.

But deciding which fund managers to pick takes more work. After all, you'll probably want to monitor your funds with more frequency than you do your asset allocation decision--perhaps semiannually, quarterly, even monthly.

And if you own individual stocks, you'll probably want to monitor them even more closely.

That makes sense. Yet, in the long run, that effort actually deserves less attention than your most crucial decision: your overall asset allocation.

Asset Allocation

Whether you're aiming for long-term growth in your portfolio (with an asset mix that consists of, say, 75% stocks, 20% bonds and 5% cash), or whether you're more interested in preserving capital (40% stocks, 40% bonds, 20% cash), this single decision is likely to have more impact on your returns than the individual stocks or stock funds you select.

Notes Hal Reynolds, chief investment officer of Wilshire Asset Management in Santa Monica: "For individuals, asset allocation is critical. It becomes the framework for the entire portfolio."

In recent years, there has been much debate as to how important allocation really is.

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