The Road Less Traveled — The Same Road You've Been Traveling

By Scott Lummer
Chief Investment Officer, mPower

My 30-year old nephew, who is a really trendy and cool guy, has been asking me for investing tips for the past five years. But as much as I love him and want to help, I hate it when he does that.

Why? Because the conversation always goes to the same place; namely, he has heard or read about some great idea, and wants to change his investment approach. After discussing it for a few minutes, I always end up saying that he shouldn't change his strategy -- he should stick with the policy that has brought him success thus far.

And in his eyes I can read his thoughts: "My uncle is really boring."

Believe me -- I want to be exciting. I want to be able to look him in the eye and tell him "now is the time to buy junk bond funds!" or "financial sector stocks are really hot right now!" But you see, I like the guy, and I want him to do as well as he can. So I remind him that a lot of thought went into building his financial plan, and his goals are long-term, so he should continue with the investment plan he started.

The two most important things you can do to achieve success in reaching your investment objectives are to:

• invest as much money as you can, and
• stick with your plan.

At first glance you might think that you can't do too much harm by switching around your investment strategy -- i.e., "playing the market." For example, suppose you think that next month international stocks will do well, so you shift a lot of your investments from domestic funds to foreign stock funds. Sometimes you win and sometimes you lose, so in the end, you break even, right? Wrong! While winning half of the time and losing half of the time will not change your average return, the risk of your overall portfolio will go up. My research has shown that the increase in risk can be as much as 50% -- the highs will be 50% higher, and the losses will be 50% greater.

But more importantly, when investors switch investment strategies, they tend to lose more often than they win. Research shows that even sophisticated institutional investors tend to make poor timing decisions. And individual investors make abysmal timing choices.

Here's the most recent example: investors in 401(k) plans moved an aggregate 9 billion dollars out of equity funds and into bond and stable value funds as a result of the decline in stocks during August 1998. Over the next four months the stock market earned 29%, meaning that those investors cashed in their equity funds at the bottom of the market, and missed out on increased returns.

Yet we continually hear people talking about changing their investment strategy. And we frequently read magazine articles about new investing ideas. It is reasonable to ask why so much attention is devoted to change, when consistency is supposedly so important. The reason is that people talk about what excites them, and editors tend to publish stories that titillate their readers. The status quo is seldom compelling. When was the last time you bought a publication headlined: "We recommend no change!"?

No, only fans of avant-garde Eastern European films find entertainment value in monotony. But of course, the goal of an investment plan is not to entertain. Idle chitchat with friends and blurbs in the press should not drive your investment strategy.

So while it is advisable to monitor your mutual funds to verify that they are maintaining their performance goals, and to update your financial plan to make sure you are on track to reach your goals, I caution you against meddling with your overall investment strategy. The path to success is paved with "consistency" -- and your objective should be success, not excitement.

Now if you'll excuse me, I've got to run. I promised my nephew I'd take him to see this new Hungarian flick about the life of a dandelion.

Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment Officer, is a recognized expert in the investment field. He has conducted extensive research on asset allocation, international investing, risk management, mutual fund analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He wants to know what's on your mind, so feel free to send him your questions about the stock market! He'll answer as many as he can in his weekly column.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

The Road Less Traveled — The Same Road You've Been Traveling

By Scott Lummer
Chief Investment Officer, mPower

My 30-year old nephew, who is a really trendy and cool guy, has been asking me for investing tips for the past five years. But as much as I love him and want to help, I hate it when he does that.

Why? Because the conversation always goes to the same place; namely, he has heard or read about some great idea, and wants to change his investment approach. After discussing it for a few minutes, I always end up saying that he shouldn't change his strategy -- he should stick with the policy that has brought him success thus far.

And in his eyes I can read his thoughts: "My uncle is really boring."

Believe me -- I want to be exciting. I want to be able to look him in the eye and tell him "now is the time to buy junk bond funds!" or "financial sector stocks are really hot right now!" But you see, I like the guy, and I want him to do as well as he can. So I remind him that a lot of thought went into building his financial plan, and his goals are long-term, so he should continue with the investment plan he started.

The two most important things you can do to achieve success in reaching your investment objectives are to:

• invest as much money as you can, and
• stick with your plan.

At first glance you might think that you can't do too much harm by switching around your investment strategy -- i.e., "playing the market." For example, suppose you think that next month international stocks will do well, so you shift a lot of your investments from domestic funds to foreign stock funds. Sometimes you win and sometimes you lose, so in the end, you break even, right? Wrong! While winning half of the time and losing half of the time will not change your average return, the risk of your overall portfolio will go up. My research has shown that the increase in risk can be as much as 50% -- the highs will be 50% higher, and the losses will be 50% greater.

But more importantly, when investors switch investment strategies, they tend to lose more often than they win. Research shows that even sophisticated institutional investors tend to make poor timing decisions. And individual investors make abysmal timing choices.

Here's the most recent example: investors in 401(k) plans moved an aggregate 9 billion dollars out of equity funds and into bond and stable value funds as a result of the decline in stocks during August 1998. Over the next four months the stock market earned 29%, meaning that those investors cashed in their equity funds at the bottom of the market, and missed out on increased returns.

Yet we continually hear people talking about changing their investment strategy. And we frequently read magazine articles about new investing ideas. It is reasonable to ask why so much attention is devoted to change, when consistency is supposedly so important. The reason is that people talk about what excites them, and editors tend to publish stories that titillate their readers. The status quo is seldom compelling. When was the last time you bought a publication headlined: "We recommend no change!"?

No, only fans of avant-garde Eastern European films find entertainment value in monotony. But of course, the goal of an investment plan is not to entertain. Idle chitchat with friends and blurbs in the press should not drive your investment strategy.

So while it is advisable to monitor your mutual funds to verify that they are maintaining their performance goals, and to update your financial plan to make sure you are on track to reach your goals, I caution you against meddling with your overall investment strategy. The path to success is paved with "consistency" -- and your objective should be success, not excitement.

Now if you'll excuse me, I've got to run. I promised my nephew I'd take him to see this new Hungarian flick about the life of a dandelion.

Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment Officer, is a recognized expert in the investment field. He has conducted extensive research on asset allocation, international investing, risk management, mutual fund analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He wants to know what's on your mind, so feel free to send him your questions about the stock market! He'll answer as many as he can in his weekly column.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.