Most investors operate on some variation of the “set it and forget it strategy.”
And that’s why – more often than not – they’re surprised by the terrible things that happen to their money when the stock market stumbles.
But it doesn’t have to be that way.
Studies show you can dramatically boost your performance and potentially beat the stock market by following five simple rules.
I’m going to talk about the first three today. Then on Tuesday, I’ll go through the last two. So make sure to look out for the second part of this report in your inbox then.
Rule #1 – Set Goals and Monitor Your Progress
Most investors have no understanding of where they’ve been – let alone where they want to be. So start out by figuring out where you want to wind up. Then craft a plan that helps you get there.
For instance, if you really want above-average income, don’t waste your time with growth-only choices that pay no dividends. Various studies show that dividends and reinvestment can contribute as much as 97% of total long-term stock-market returns.
Similarly, if data shows that 75% of the world’s economic activity now takes place outside U.S. borders, investors who have only 6% of their holdings in international stocks will end up with a substandard portfolio.
For decades, we’ve heard over and over how international investments should comprise 5%, 10% or at most 15% of our portfolio’s total value. Any more than that is foolhardy and risky, the pundits tell us.
Yet best-selling author and famed Wharton Business School Professor Jeremy Siegel believes that such long-held conventional wisdom on international investing should be thrown right out the window. In fact, an allocation of 40% or more may be more appropriate, Siegel says. And that matches my own research.
Rule #2 – Concentrate Your Assets
Many investors are familiar with the concept of “diversification” – or at least the form that Wall Street practices. Common wisdom tells you to spread your assets around, reasoning that this will protect you from a single catastrophic loss.
But this is like rearranging the deck chairs on the Titanic. No wonder investing icon Warren Buffett reportedly quipped that “diversification is for people who don’t know what they are doing.”
Like Buffett, I think it’s far more important to concentrate your assets. In doing so, you’re investing in a more limited list of things that you can better understand, keep tabs on and react to. That also suggests that you’re investing in the certainty of projected returns, rather than trying to protect your money against things you can’t control in the first place.
That’s why I advocate investing in globally unstoppable trends with literally trillions of dollars behind them. I’ll bet you can probably name most of them with relative ease: inflation, global commodities and natural resources, the emergence of China and its effect on global earnings, bond bubbles, population growth and more.
Rule #3 – Structure Your Portfolio and Rebalance at Least Yearly
Most investors get caught up in one of two extremes. Either they “over-manage” their portfolios and wind up trying to maneuver through every possible swing, shimmy and shake the market throws at them – usually with limited success.
Or they don’t pay any attention whatsoever – and when they finally do examine their statements, they’re left to wonder why their 401(k) turned into a 201(k).
To properly structure your assets, consider a simple, proven model – such as the 50-40-10 strategy we recommend at Money Morning as well as in our sister publication The Money Map Report. Because you’ve got three clearly defined “tiers” to play with, every investment has a place – and a specific role – in your portfolio.
The 50-40-10 pyramid is a lot like the “food pyramid” many of us remember as kids. The stuff on the bottom – the 50% we assign to safety and balance – is the food that tastes like wallpaper paste, but that your mom insisted (and correctly so) “was good for you.”
The middle layer – the 40% we put in global income and growth – is the stuff that actually tastes great and is stuff you want more of. The top 10% – the wild “rocket riders” – is the beer and chips, the chocolate mousse, or whatever other delight you can envision.
If you examine your statements and find that one segment – the 50, the 40, or the 10 – has gotten too large, it’s a simple, self-reinforcing matter to sell some of your winners and redistribute that money into new choices to bring your money back into balance.
There’s another benefit, too. When used properly, a strategy such as the 50-40-10 ensures that you achieve the three goals that are common to all successful investors. In short, you:
- Maintain discipline – in an automated way.
- Generate higher-than-average income.
- And achieve a greater overall stability for your portfolio.
That’s not to say that a 50-40-10 portfolio can’t come under pressure if the markets do. But we can say that, over time, the comparative stability it creates can help you avoid surprises that clobber most investors and doom them to sub-par returns.