Now that we hit the record highs on several of the stock market indexes, it is time to be choosy about future investments. This reminds me of a famous commercial when I was growing up with the mantra “Choosy mothers chose Jif.” Well, now that markets have more than doubled off their low points, investors can afford to be selective. In the peanut butter analogy, you can afford to buy the best.
The real question is how to be selective trying to invest in a market that feels like you are paying too much for anything you consider. Here is a primer our investment committee recommends when working with your adviser.
1. Determine the length of time for your portfolio. If it is longer than a full business cycle of seven to ten years, don't worry about what point you are buying in. The strategy and allocation is much more important than the timing.
2. Build a strategy based on proper diversification for your time frame and risk budget. This allows you to add a variety of different types of investments, some of which may not be at a high-water mark yet.
3. Seek the best “risk-adjusted” returns for each piece of your portfolio. “This means you want to research additions to your portfolio based on risk first,” says KFS Investment Analyst Greg Richards, CFP. Returns are actually a byproduct of how much volatility you are willing to accept. This can help avoid the short-term high flyers and direct you more towards long-term consistency.
4. Consider what category you are adding more money to and how that category is performing. If you have an opportunity to buy lower in a different sector, consider putting money to work in the undervalued asset class first. Dollar cost average by investing in smaller sums over a period of time to get average pricing over good and bad months. This will lessen some of the pain when the market corrects.
5. Resist the urge to only buy the best performers. In fact, you may want to consider trimming those categories by taking some profits off the table in those asset classes and using the proceeds to buy in areas that are not yet overvalued.
Richards, who heads up the investment committee, reviews over 20 different metrics before investing. He suggests at a minimum, investors wanting to get into the market at these levels should at least research some basic risk measures. Review downside capture, active share, standard deviation and Sharpe ratio to get a feel for how a manager may perform in various market conditions. The current performance may not be a good indication of how sustainable your returns will be over your time frame.
Patricia Kummer has been an independent Certified Financial Planner for 26 years and is president of Kummer Financial Strategies Inc., a Registered Investment Advisor in Highlands Ranch. She welcomes your questions at www.kummerfinancial.com or call the economic hotline at 303-683-5800.Any material discussed is meant for informational purposes only and not a substitute for individual advice. Investing is subject to risks including loss of principal invested. Investors cannot purchase an index directly; these are used as a benchmark only.