THE RATIONAL INVESTOR: Don't ignore basic investing principles during economic uncertainty

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Robert Stepleman

These last several years have been unsettling for investors. We have seen essentially two bear markets and two bull markets. These turbulent markets caused many investors to ignore or forget the fundamentals of sound long-term investing success. Just like baseball players that every spring spend time on reviewing the basics of sound baseball, it’s important that investors do a similar back-to-basics review.

One basic is asset allocation. Every investor should have goals, an asset allocation that aligns with their goals and their risk and return requirements and review it regularly. If it has “drifted” by more than 5 percentage points, investors should consider rebalancing it. For example, if their desired allocation is the classic 60% stocks and 40% bonds and it’s now 55% stocks and 45% bonds, they should consider selling some bonds and buying some stock to return it to the desired allocation. Changes in risk and return are highly correlated with changes in asset allocation.

Another basic is securities risk. Anything but CDs, short-term U.S. Treasury securities or money market funds involves real risk. Investors should review their securities to make sure they understand what kind of risk they are incurring and is the hoped-for extra return that they expect large enough to compensate me for these risks. Risk can change over time with economic changes and individual securities outlooks and investors should be on guard for these changes.

It’s also basic for investors to understand their investment style: Are you an aggressive investor looking for maximum capital gains? Are you a conservative investor looking to preserve capital? Are you an income investor looking to maximize income? Your investments should correlate with your style.

Ask fundamental questions

This leads to two basic questions: What role does each particular investment play in my portfolio? How is it going to help me meet my investing goals? A portfolio that is a hodgepodge of randomly selected securities without an overall strategy is unlikely to be effective at meeting the investor’s goals.

Another basic question is: Do I understand my investment limitations? It’s critical that an investor not invest in strategies or securities that he doesn’t fully understand. Investing beyond one’s skill can result in damage to your financial health. For example, buying an individual “junk” bond when the investor doesn’t have the ability to analyze its likelihood of default is asking for trouble. Similarly, following an option investing strategy without understanding the details of how options work or how to decide on their “fair” value is asking for trouble.

Another basic question is: Do I have realistic expectations of the returns available from distinct kinds of investments based on their historical returns and future economic possibilities? This knowledge can prevent investors from making foolish mistakes. For example, if someone touts a stock as likely to return 50% a year and the investor knows that stocks have historically returned about 10% and the economy is looking uncertain, then they should scrutinize this investment very carefully and possibly avoid losing money.

All data and forecasts are for illustrative purposes only and not an inducement to buy or sell any security. Past performance is not indicative of future results. If you have a financial issue that you would like to see discussed in this column or have other comments or questions, Robert Stepleman can be reached c/o Dow Wealth Management, 8205 Nature’s Way, Lakewood Ranch, FL 34202 or at He offers advisory services through Bolton Global Asset Management, an SEC-registered investment adviser and is associated Dow Wealth Management, LLC.

This article originally appeared on Sarasota Herald-Tribune: ROBERT STEPLEMAN: It’s back to basics for investors in turbulent times