07/31/2013 08:33 pm ET Updated Feb 02, 2016

Stay Balanced and Ignore the Noise


The two of us and another gay couple celebrate July birthdays. We take the opportunity to have a splendid dinner and great conversation and rein in four free desserts!

We'd scarcely sat down when our friend Bob complained to the waiter about the noise from 10 drinking patrons at the adjacent table, two feet away. We felt uncertain about a quiet and peaceful dinner, feeling we had to do something. This popular restaurant was full, so we couldn't move to a quieter area, and it was too late to overreact by leaving for a quiet bistro. Fortunately, the noisy patrons had drunk enough and left after a few minutes. Thank goodness!

Our inebriated, noisy neighbors got us thinking about another type of noise, one with potentially negative consequences on investments.

In the coming months the corporate financial media and pundits will bombard us with frightening predictions and conspiracy theories as we approach the contentious debt ceiling debate, endless talk of a new Federal Reserve chairman and limitless other petty items. The financial news racket has little or nothing to do with maintaining our balanced investment plan. No matter what your age or individual financial status may be, do not change your retirement plan because you heard a piece of scary financial information from the print media, television or the Internet for the umpteenth time. Your retirement plan should be set up now to consider all sudden crises that might affect your portfolio. How can we prepare for endless uncertainty?

Stay Balanced

In the middle of panic-driven financial news affecting stock market performance, we often think we have to do something. Tomorrow's overreaction to stock market volatility can be prevented by what you do today. Preparation will protect you before your analytical monkey mind deep-sixes you. Get your head and your asset allocation (AA) established early on.

First your head:

  1. Think long-term -- 15 to 20 years or more.
  2. Expect surprises, crashes, bubbles, bear markets, corrections, high interest rates, high inflation, deflation and hundreds of other stock-market moving parts that keep financial reporters drooling.
  3. Expect average stock market returns over time, and stay the heck away from any adviser/broker who claims that they "beat the averages."
  4. Hire a fee-only, fiduciary registered investment adviser (RIA) paid by the hour.
  5. Once you have set up your plan, stay the course.
  6. Expect the markets and your portfolio to decline in value from time to time.

Asset allocation (AA):

  1. Keep it simple.
  2. Invest in the lowest-cost, broadest indexes or exchange-traded funds (ETF) possible to get maximum diversification worldwide.
  3. Diversify in the major five stock-market asset classes: large-cap, mid-cap, small-cap, real estate investment trusts (REITS) and international asset classes.
  4. Diversify in the broadest bond indexes or ETFs as possible for maximum diversification: government, Ginnie Mae, treasury-inflation-protected securities (TIPS) and corporate bonds with intermediate maturities.
  5. Rebalance to your original asset allocation percentages when your holdings get out of whack. Rebalance annually, or when any asset class is 5-percent more (or less) from your original plan. For example, if your large-cap asset increases and your small-cap decreases, sell some large-cap and buy more small-cap.
  6. Maintain a stock/bond split with the bond allocation roughly equal to your age. Target retirement funds are managed so that when investors get older, they increase bond allocation (fixed accounts). An 80-percent stock allocation is too risky for retired investors, but not for 25-year-olds. Older folks don't have the time to recover from a severe bear market. For example, since we average 70 years old, we have 30 percent in stock indexes and 70 percent in bonds.

We expect nothing more than what the market offers in our balanced plan. No expert, no fortune teller, no guru can predict ahead of time stock market bulls and bears. Stick with the plan through market noise and volatility. In the last debt ceiling debate in the summer of 2011, our 70/30 portfolio declined in value by tens of thousands. It was only a 7-percent decline, but it was significant. We were concerned, but our pre-plan prevented us from overreacting by bailing out or changing our asset allocation. Our portfolio recovered what we "lost" in the subsequent four months.

Ignore the Noise

Like our restaurant party-goers, noise moved on, and the uncertainty of a quiet dinner resolved itself. In the business news world, media racket comes and goes and will always be replaced by similar brouhahas. Their purpose is to grab the investor's immediate attention so that their ratings rise, but the collateral damage is worse. Far too often investors want to do something: buy, sell, panic or all the above. The more shares bought and sold, the richer Wall Street and your broker get. William Bernstein, in his book The Four Pillars of Investing, wrote that "you are better-off ignoring the entire genre -- print, television, and the Internet."

A fiduciary fee-only adviser can help draft your AA strategy and urge you to stay the course. This psychological support should not be underestimated: A competent adviser will help you stick with your plan.

An unexciting portfolio is a genuine gift that flies in the face of the tumultuous and illusory world of over-the-top financial "excitement." Yes, it's tempting, but an exciting and "glamorous" portfolio will not get us to our financial goals safely. Remember, friends who brag about how much money they made will not share stumbles or sleepless nights. We know who won the race between the tortoise and the hare. A "boring" portfolio builds wealth slowly and steadily, allowing time for a good night's sleep, quality time with family and friends and a comfortable nest egg in retirement.

Sharing our birthdays with gratitude for good health, good friends and our 38-year relationship is genuine life-affirming excitement. By the way, the free desserts were fabulous too.

Best of fortunes.

Content concerning financial matters, trading or investments is for informational purposes only and should not be relied upon in making financial, trading or investment decisions.