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Apply Principles of Parenting to Your Portfolio

Patience and discipline are among tools also useful for managing and nurturing investments.


Need help handling today's tumultuous financial markets? Don't think finance. Think family.

Managing money is a lot like managing children, professionals say. It can be painful and frustrating at times, but parents with patience and discipline are likely to find the results gratifying in the end.

"Long-term, we are optimistic about the potential for our teenagers and our portfolio," said Alan Bernstein, a parent of two and an investment advisor with Stratigraphic Asset Management in Coral Gables, Fla. "But those unpredictable short-term movements are maddening."

Herewith, some tips on "parenting" your portfolio to increase your odds of long-term success, regardless of markets' short-term gyrations:


Learn the Basics

"The first thing I tell parents is that none of us are born knowing how to parent any more than we are born knowing how to drive a car," said Elizabeth Pantley, a Seattle parent-educator. "We have to study and learn and talk to people. The more we know, the better job we do."

Knowledge keeps new parents from calling psychologists when a 2-year-old throws a temper tantrum. It also should keep seasoned investors from selling in a panic--or from loading their portfolios with technology stocks without understanding the risks.

Savvy investors know that stock prices are subject to sharp, unpredictable and often-embarrassing swings in value. That makes putting the rent money in stocks as inappropriate as taking a toddler to an opera.

When investments are in the right places--short-term money in safe and predictable vehicles such as bank deposits, long-term money in riskier but higher-yielding stocks--investors can relax knowing that no matter how bad the market's near-term behavior, it eventually will grow out of it.


Have a Mission

Everyone needs a clear idea of the handful of important values they hope to pass on to their children--such as integrity, courage and kindness, said Victoria Collins, an Irvine-based certified financial planner. Keeping these big-picture values in mind helps remind parents why it's not a good idea to preach the virtues of honesty while lying about a child's age so you can get a discount at the movies.

The finance corollary is called an investment policy statement, said Collins, who has produced as many investment books--five--as she has children.

This statement should detail what you want to accomplish with your portfolio--your short-term and long-term goals--and what you aren't willing to do for potential financial gain, she said. Listing your limitations is a way to spell out your tolerance for risk.

"The investment policy statement gives the parameters of what you can tolerate and provides guidance on where you want to go and how you want to get there," Collins said.

Although this policy statement won't help you pick individual securities, it will help you figure out broadly how much money ought to go into which category of investment--stocks, bonds, cash and real estate, for example.


Be Persistent

"Investing regularly is like telling your kids to make their beds," said Barbara Steinmetz, a planner with Steinmetz Financial Planning in Burlingame, Calif. "Every day, you tell them. Every day, they groan, and say, 'But Mom ' But after a while, it becomes routine--it's not a sacrifice, it's just what you do."

Persistent investing is called dollar-cost averaging. Anyone who invests through a 401(k) retirement savings plan already is doing dollar-cost averaging. Every month, the same amount goes into savings, often through some sort of automatic deduction.

With 401(k) plans, the deduction comes out of your paycheck. However, investors whose employers don't offer such plans can set up dollar-cost-averaging programs directly with many mutual funds, banks or brokerages.

There are two main advantages to such persistent investing, experts say. The first is that it makes investing a habit--much like making the bed.

The second is that if you invest regular amounts, in good times and bad, you buy more shares when stock prices are down and fewer when prices are up. If investment values rise over time, as they have historically, this strategy pays rich long-term rewards.

Consider a person who invests $120 a month, every month, in the same stock or mutual fund, said Kirk Bogard, regional area manager and vice president of Fidelity Investments in Newport Beach. The first month, the stock costs $8; the second, it costs $12; and the third, it costs $10.

"Your average price is $10 a share, right? Wrong," Bogard said. "Your average share price is $9.73. Because you're buying more when the price is down, you've brought down your average purchase price."


Be Patient

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