After the Brexit vote, I heard a number of financial “experts” on television warn 401(k) plan participants to check their investments for exposure to UK stocks. Many years ago, a friend of mine used the term “financial gossip” to describe these programs. The term is fitting because, for the typical investor, these channels draw in our attention but can ultimately cause more harm than good – they are noise, plain and simple.
The unfortunate truth is that many 401(k) retail investors associate visibility with credibility. In the financial services industry, many of the talking heads you see on television have no obligation to put the investor’s interests before their own—or before their ratings, for that matter. The investors, on the other hand, take these financial advisors’ advice to heart because they don’t understand why it’s being offered.
In the midst of the Brexit vote, investors watched these sensationalist TV shows with the assumption that what they were consuming was in their best interest—when in fact, in order for them to have determined their 401(k) exposure to the UK or any other country, they would have to be invested in a highly concentrated portfolio which, according to extensive academic research, is very dangerous.
Consider how various markets around the world responded to the outcome of the Brexit vote, and how they were affected a week later. The patient investor who chose not to give in to the knee-jerk reaction by selling into the downturn, and stay the course, would have fared pretty well.
In my opinion, smart investing requires patience, experience, thorough preparation and sound academic research. Over my 33 years in institutional trading, sales and as a financial advisor, I’ve trained and counseled thousands of advisors and investors on how to be successful in their investment strategies—here are some timeless tricks:
- Diversification is a good thing. Owning thousands of stocks around the world either through low cost mutual funds (I believe index and factor-based funds are best), or ETFs with large asset bases may benefit your portfolio.
- Your stock to bond allocation will drive your returns, so think carefully about how aggressive you want to be. For example, 100% of your money in stocks has a greater chance in attempting to deliver higher returns over the long run, but in the short run it can be a rocky ride. You should expect a drop up to about half of your account balance. For most investors between the ages of 40 and 65, our strategists believe a 60% stock and 40% bond allocation makes sense.
- Consider becoming more conservative as you age, which means allocating more of your portfolio to bonds as you move closer to retirement. If you aren’t using a target date retirement fund (a pretty good option), then you should periodically rebalance your account. Most 401(k) plan providers offer a simple rebalancing tool on their web sites. Do this every 12-24 months.
- Historically, stocks have been a good hedge against inflation in the long run. We believe that all investors, with few exceptions, should have an allocation to stocks regardless of their age.
Remember, the next time a major geo-political event occurs and the Chicken Littles on cable TV are shouting “Run to the exits,” change the channel, not the allocation in your retirement account. Those who stay firmly grounded in their long term investment strategies will ultimately rise above the many political bumps in the road that lay ahead.
Patrick Sweeny, Principal of Symmetry Partners. Symmetry Partners, LLC is an Investment Advisory Firm registered with the Securities and Exchange Commission, located in Glastonbury, Connecticut. The firm designs and manages portfolios made available through a group of select advisors, including a suite of factor-based ETF portfolios.