Follow Up

I said I wanted to follow up about what I think it takes, in a world of many new tools, for someone to manage their own portfolio in terms of time, understanding, emotion and whatever else comes up.

First is time needed. This obviously depends on where someone is starting from and I think can also depend on how much money they have accumulated. A person with $10 million and with only a $150,000 income needed doesn't need his portfolio to do as much as the person with $1.8 million and a $100,000 income need. This assumes both of these examples have done what they need to with respect to estate issues.

Time needed breaks down into three things (my opinion). People need to spend learning, the need to keep learning never goes away. People need time to keep up with what is going on in terms of capital markets current events. This will help isolate some big picture themes and provide for proper monitoring of whatever you own.

The third time requirement, although this could be included in the first two, is the traditional staying current, from a bottoms up view, of what you own and seeking out new stocks or products to consider. For example I have written many times about my belief in New Zealand as an investment destination. I think Telecom New Zealand is the best way to access New Zealand but I don't know that that will always be the case. At some point there may be a better choice and when/if there is something better I would have no hesitancy in switching.

Understanding capital markets is crucial to managing your portfolio. Often emotion tells us to sell or buy at exactly the wrong time. While there are no absolutes, times of great fear mark bottoms not tops. In my brief career that has happened repeatedly, 1987, 1989, 1997, 1998, 2001 and I am sure I am leaving a couple out. This is just an example, there are countless this is how it works truisms that need to be learned. No one will know them all but you need to start somewhere.

There are also many basic market mechanics that I think need to be learned like that P/E ratios have a bad track record for predicting stock market behavior. Again, there are a ton of these as well.

I mentioned emotion previously but this is very very important, and again ties in with understanding and time committed. No matter how much emotion you spend on your portfolio, some things will not change. The market will be up (maybe not a lot) most of the time, more than 70% of the time actually. It will go down the rest of the time. That will not change no matter what think or how you react.

A $1 million bond portfolio with a maturity of 15 years will be worth $1 million in 15 years. The stock market has been up in more than 90% of every 15 year rolling period over the last 100 years. On December 26, 1990 the S+P 500 closed at 330.85. It is has been a almost a four bagger. From Dec 1975 to Dec 1990 the S+P 500 went from 90 to 330. The fifteen year period ending with the low of November 2002 saw the S+P 500 go from 241 to 876.

The magnitude may change but this is how it works, regardless of anyone's sentiment. If you are inclined to comment about this I would urge to look at some of the huge up years in the 1930's, huge. This is often thought of as a horrible period for stocks. Some of the years were bad but some were fantastic. Ditto the period from 1968 to 1981. In 1975, following after a lousy year, the S+P 500 was up 31%. In 1976 it was up another 19%.

The market often goes up a lot for no reason at all when few people expect it to. This is why despite my expecting 2006 to be down a little I am not taking action now because I could easily be wrong. If the market starts to roll over, that will be when I take defensive action again.

Another aspect to this is that people listen to reason when there is nothing to be afraid of but do not listen when there are things to be afraid of. For example, a market crash is a bottom not a top. This is just how it works over and over. We have no crash now so that is easy for anyone to believe. The next time we have a crash ( I guarantee there will be a next time) if I tell 100 people crashes are bottoms not tops, how many of those 100 people will sell anyway?

This may read like I don't think people can do it themselves which is absolutely not the case. With all that I have covered here, there has been no mention of time spent stock selection. Various funds, ETFs or products of any sort can allow for thorough diversification and successful results.

I also concede that this post is not a complete writing on the subject. I think this can be a good starting point for someone wading through this sort of decision process about what to do for themselves.