It looks like being another bumper day for stocks as Australia & New Zealand Banking Group [ASX: ANZ] reveals its full year results.
What have we been telling you for the past year? Buy stocks. Hopefully you already have and so today you can focus on day two of ‘Retirement Week’ rather than worrying about whether to buy into this rally.
Yesterday we left you in no doubt about your options for saving for retirement.
If you missed yesterday’s Money Morning we’ll give you the five-second version of our thoughts on risk-taking: You don’t really have a choice. You have to take risks.
Although as Nick Hubble showed subscribers of his Money for Life Letter this month, there is one way to kick risk to the kerb.
But for the most part you can’t avoid taking risks. That’s why we say you should acknowledge it, plan for it, and then do something about it. Here’s how…
For two years we’ve recommended a fairly simple approach to risk taking and investing.
In fact it’s so simple some have said it’s simplistic (childish even) and obvious. Saying that, whenever we’ve asked those people how they approach risk taking and investing we get little more than a few ‘ums’ and ‘ahs’.
It seems our approach is so obvious either they hadn’t thought of it or if they had, they haven’t done anything about it. We don’t know what kind of investor that makes them – not very good investors, we guess.
But that’s fine. We make no apology for keeping things simple. To be honest, we’d say our approach is so simple you could teach it to your kids or grandkids.
And as far as investing goes, handing down your investment knowledge to the next generation is a key part of building and preserving family wealth. We know our retirement expert Vern Gowdie would agree with that.
Don’t be a Lazy Investor
You may have seen us discuss this strategy before. But there’s no harm in going over a bit of old ground. Besides, sometimes it takes more than once to get the message across.
So perhaps today’s issue of Money Morning will jog your memory.
As you know by now, we don’t like diversified investments. We see diversification as a cop-out. It’s the opposite of making a committed decision.
So instead of diversifying investments, we like to compartmentalise our investments. What do we mean by that? And how is it different to diversification?
Well, diversification is lazy investing. It involves sticking our money in a broad range of investments and then not paying much attention to how those investments perform.
The way we approach investing is different. Compartmentalising your investments involves making a decision about where you’ll invest. In short, it’s not a scattergun approach. It’s a well thought out and executed approach.
Let’s show you an example of how we do it…
Long Term Investing Doesn’t Mean Buy-and-Hold
Our first step is to split our liquid and investable assets into two blocks. We call one block ‘Safe Money’ and the other block ‘Punting Money’.
Remember, this is how we do it. You may come up with a different way to compartmentalise your money and assets into a way that suits you. This isn’t to say ‘this is how you have to do it’, it’s about getting you to think more about how you manage your money.
In the ‘Safe Money’ block we include our long-term investments. Right now this includes cash, gold and silver bullion, and dividend paying stocks. Now, just because this is ‘Safe Money’ doesn’t mean it’s ‘buy and hold’ money.
If a stock you’ve bought doesn’t appear to be living up to expectations, sell it. There’s nothing wrong with that. Things change. Revenue and profit growth can slow. Businesses can ‘go bad’.
In the ‘Punting Money’ block we include speculative investments. That includes small-cap growth, small-cap income, and blue-chip growth stocks.
From time to time we assess the weighting of each asset and investment in the portfolio. So when we have cash flow to invest we look at the outlook and decide whether we want to add more to the ‘Safe Money’ pot or the ‘Punting Money’ pot.
See, we told you this is simple.
Once we’ve decided in which ‘pot’ to put the money we then decide which specific investment. For example, if we had to allocate capital today we wouldn’t hesitate to allocate part of it into speculative small-cap stocks.
The important thing to remember is that this is active portfolio management.
It involves taking an interest in financial markets and asset prices. It doesn’t mean you have to become an expert, but you do have to show at least a minor interest in investing.
Wishing Won’t Get You Far
Active investing (which doesn’t necessarily mean trading, it just means taking an interest in your investments) is the side effect of a volatile and unpredictable market.
If the market was predictable and with low risk it’s arguable you wouldn’t need to be an active investor. You could just buy an asset and then forget about it.
But as long as interest rates stay at record low levels and investors remain uncertain about the outlook for the local and global economy, it will be essential for you to actively manage your investment portfolio.
This is the only way to make sure you have enough savings to see you into retirement. If you have a positive outlook you can direct cash flow into strong dividend paying stocks or speculative stocks to take advantage of a rising market.
On the other hand, if you’re cautious about the short to medium term outlook for stock prices you could increase your cash exposure.
We wish investing didn’t have to be so involved. It would be great if you could just set money aside knowing that it will be enough to fund your retirement. But wishing won’t get you far in this market…or in retirement. You’ve got to be decisive and active.
By following this simple approach (or coming up with your own) you can do everything in your power to save for retirement without putting an excessive amount of your capital at risk.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years
