Geoff Wisner

Get Rich Slowly!

By now, if you're taking part in our new 401(k) plan, you've decided how much of your salary to have deducted from your paycheck, and how you want to divide it. Congratulations! You are now an investor (whether or not you were before).

As an investor, you face various hotly debated investment issues: market timing, risk vs. return, the impact of taxes and inflation, etc. To discuss even one or two of these topics fairly would take up more space than I have. Instead, here are some suggestions that I personally believe in, and the reasons behind them.

1. Ignore the money market fund. The money market fund is in the plan because it's needed for administrative reasons, and because the IRS wants plans to have a range of "safe" and "risky" investments. It's very safe, but it doesn't give you any real growth -- and for retirement money, growth is the goal.

2. Have an investment strategy, and stick to it. The simplest and perhaps best strategy is to come up with a breakdown that suits you, and then stick to it come hell or high water. (The "conservative" portfolio suggested by Daniel Wiener of the Independent Advisor for Vanguard Investors would suggest you put 50% in the Index 500, 20% each in International Growth and Small-Cap, and 10% in Emerging Markets.) This method helps protect you from the great temptation to buy stocks when prices are high (like the S&P 500 right now) and to sell when prices are low (like foreign stocks right now).

Another, more aggressive strategy would be to put each year's new money in the two funds that have done worst in the previous year. That is, BUY LOW. Even bolder is the strategy followed by an executive at the Oppenheimer investment company who moves all his 401(k) money each year into the two Oppenheimer funds that have done worst in the previous year. This method requires that none of your funds are turkeys: that they are all either index funds or are reasonably well-managed. It's worked very well for the guy at Oppenheimer, but it's too risky for my taste.

The key is to choose a strategy and stick with it. If you don't, you are likely to get carried away with recent performance, and buy a certain kind of stock when it's been doing especially well -- i.e., when its price is high.

3. Ignore the telephone exchange feature. Telephone exchange is an invitation to do exactly what you shouldn't: make impulsive changes to your investments based on recent changes in the stock market. If you plan to change your allocation from time to time, once a year is probably enough.

But what if there's a crash, as there was in 1987? Shouldn't you sell as soon as possible? No. Not unless you think the market is going to stay down from now until you retire. It's just as good to buy stocks when they're on the way down as it is when they're on the way up.

4. Never sell. When you move money from Fund A in the 401(k) to Fund B, you are selling one set of stocks and buying another. Assuming you plan to move back into Fund A at some point, you are making a bet that you can get back in at a lower price than the one you're getting out at. Since the long-term trend of the stock market is upward, this is a very dubious proposition. Once you've invested money in a fund, leave it alone. Place your bets with new money only.

5. Put a big chunk in the Index 500. The big companies in the Index 500 make up about 70% of the US stock market, and (1995 notwithstanding) their prices go up more modestly but more predictably than those of small companies. The Index 500 therefore makes a good permanent ballast for your portfolio.

6. Put something in Small-Cap Stock. Which company can more easily double in size: Netscape or IBM? Which company is more likely to go out of business? Small companies can grow more easily but also go out of business more easily than big ones. This is why stock in small companies has historically been more profitable but more volatile than stock in big companies. In addition, small companies are often out of sync with large ones, which tends to even out the ups and downs in your returns.

7. Put something in International Growth. Just as small-cap stocks help even out the returns from large-cap stocks, having some foreign stocks tends to even out the returns from the US stock market. Europe and Asia sometimes do well when the US market is doing poorly (and vice versa).

8. Put something in Emerging Markets. "Invest in Malaysia and Brazil? Are you crazy?" The economies of developing countries are highly unstable, but they are also the fastest-growing economies in the world. Our emerging-markets fund spreads the risk by investing in all (or nearly all) of the emerging markets. Still, Emerging Markets should probably be the smallest slice of your pie: no more than 10%, according to some advisers.

Barring a worldwide economic collapse, all of our four stock funds should do well over the long haul. So long as you don't put too much in the money market fund -- and so long as you don't sell when the market takes a dive -- how you divide up your money is not a life-or-death decision. But making the right allocation (for you) can make for a smoother and more profitable ride.

Published in Bread and Cutter, December 1995.



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Geoff Wisner Get Rich Slowly! By now, if you're taking part in our new 401(k) plan, you've decided how much of your salary to have deducted from your paycheck, and how you want to divide it. Congratulations! You are now an investor (whether or not you were before). As an investor, you face various hotly debated investment issues: market timing, risk vs. return, the impact of taxes and inflation, etc. To discuss even one or two of these topics fairly would take up more space than I have. Instead, here are some suggestions that I personally believe in, and the reasons behind them. 1. Ignore the money market fund. The money market fund is in the plan because it's needed for administrative reasons, and because the IRS wants plans to have a range of "safe" and "risky" investments. It's very safe, but it doesn't give you any real growth -- and for retirement money, growth is the goal. 2. Have an investment strategy, and stick to it. The simplest and perhaps best strategy is to come up with a breakdown that suits you, and then stick to it come hell or high water. (The "conservative" portfolio suggested by Daniel Wiener of the Independent Advisor for Vanguard Investors would suggest you put 50% in the Index 500, 20% each in International Growth and Small-Cap, and 10% in Emerging Markets.) This method helps protect you from the great temptation to buy stocks when prices are high (like the S&P 500 right now) and to sell when prices are low (like foreign stocks right now). Another, more aggressive strategy would be to put each year's new money in the two funds that have done worst in the previous year. That is, BUY LOW. Even bolder is the strategy followed by an executive at the Oppenheimer investment company who moves all his 401(k) money each year into the two Oppenheimer funds that have done worst in the previous year. This method requires that none of your funds are turkeys: that they are all either index funds or are reasonably well-managed. It's worked very well for the guy at Oppenheimer, but it's too risky for my taste. The key is to choose a strategy and stick with it. If you don't, you are likely to get carried away with recent performance, and buy a certain kind of stock when it's been doing especially well -- i.e., when its price is high. 3. Ignore the telephone exchange feature. Telephone exchange is an invitation to do exactly what you shouldn't: make impulsive changes to your investments based on recent changes in the stock market. If you plan to change your allocation from time to time, once a year is probably enough. But what if there's a crash, as there was in 1987? Shouldn't you sell as soon as possible? No. Not unless you think the market is going to stay down from now until you retire. It's just as good to buy stocks when they're on the way down as it is when they're on the way up. 4. Never sell. When you move money from Fund A in the 401(k) to Fund B, you are selling one set of stocks and buying another. Assuming you plan to move back into Fund A at some point, you are making a bet that you can get back in at a lower price than the one you're getting out at. Since the long-term trend of the stock market is upward, this is a very dubious proposition. Once you've invested money in a fund, leave it alone. Place your bets with new money only. 5. Put a big chunk in the Index 500. The big companies in the Index 500 make up about 70% of the US stock market, and (1995 notwithstanding) their prices go up more modestly but more predictably than those of small companies. The Index 500 therefore makes a good permanent ballast for your portfolio. 6. Put something in Small-Cap Stock. Which company can more easily double in size: Netscape or IBM? Which company is more likely to go out of business? Small companies can grow more easily but also go out of business more easily than big ones. This is why stock in small companies has historically been more profitable but more volatile than stock in big companies. In addition, small companies are often out of sync with large ones, which tends to even out the ups and downs in your returns. 7. Put something in International Growth. Just as small-cap stocks help even out the returns from large-cap stocks, having some foreign stocks tends to even out the returns from the US stock market. Europe and Asia sometimes do well when the US market is doing poorly (and vice versa). 8. Put something in Emerging Markets. "Invest in Malaysia and Brazil? Are you crazy?" The economies of developing countries are highly unstable, but they are also the fastest-growing economies in the world. Our emerging-markets fund spreads the risk by investing in all (or nearly all) of the emerging markets. Still, Emerging Markets should probably be the smallest slice of your pie: no more than 10%, according to some advisers. Barring a worldwide economic collapse, all of our four stock funds should do well over the long haul. So long as you don't put too much in the money market fund -- and so long as you don't sell when the market takes a dive -- how you divide up your money is not a life-or-death decision. But making the right allocation (for you) can make for a smoother and more profitable ride. Published in Bread and Cutter, December 1995.