Daily Gains Letter

The Markets Have Changed; Time to Change the Way You Invest?

By for Daily Gains Letter |

The Markets Have Changed; Time to Change the Way You InvestSimplicity still prevails when it comes to investing for the long term—namely, saving for retirement. My good long-time friend, Mr. Speculator, disagreed with me on this statement while we were having a debate about simple versus complex investment management.

“You see, gone are the days when it worked,” he said. “Markets have changed. To manage their retirement savings and portfolio, investors really need to start using advance portfolio management techniques, or else they won’t have enough by the time they need the funds.”

Mr. Speculator may be right: some aspects of the markets have certainly changed. For example, the introduction of computerized trading (high-frequency trading) has made markets prone to wild swings. Remember the flash crash in 2010? The Dow Jones Industrial Average plunged about 1,000 points, and then recovered a few minutes later.

Sadly, Mr. Speculator is forgetting that when you are saving for retirement, you are looking at a long-term horizon. Investors shouldn’t be focused on day-to-day fluctuation when they are investing for the long term.

Simple investment management, such as buying good companies for a long period of time, works.

Consider a person saving and investing for retirement in 20 years. Instead of looking for quick profits and worrying about wild swings in the markets, they can just look at companies like The Procter & Gamble Company (NYSE/PG).

Look at the chart below of the company’s stock price in the last 30 years. As you can clearly see, it has risen in spite of all the wild swings we have seen in the overall markets over the last decade, such as the tech boom and the subprime mortgage collapse.

Procter & Gamble  chart

Chart courtesy of StockCharts.com

In addition to this, the company also provides a dividend. To give you some idea, since the beginning of 2008, when the entire financial crisis started to pick up steam, the company has rewarded investors with more than $11.00 in dividends. Also, don’t forget the price appreciation, which has gone from roughly $72.00 in the beginning of 2008 to now hovering above $80.00. (Source: “PG Historical Prices,” Yahoo! Finance, last accessed August 9, 2013.)

Saving for retirement is all about stable returns, and companies like Procter & Gamble provide just that. The company has a strong grasp on its market and offers many different consumer products.

The stock market—or any other market, for that matter—will have wild swings, but investors saving for retirement don’t really have to do something they don’t understand. In addition, complex investment management may be expensive for an investor with limited savings. Simple investment management techniques go a long way, and it’s very evident.

Speculation and trying something new certainly give the investor excitement, but a retirement portfolio is very critical, and investors shouldn’t take a lot of risk.

One thing that needs to be said is that investors need to keep a close eye on their retirement portfolio over time. Even though their investment horizon is long term, we have seen what happens when a crisis hits. Giants like Lehman Brothers have failed and others, like General Electric Company (NYSE/GE), have edged in very close to bankruptcy.

VN:D [1.9.22_1171]
Rating: 10.0/10 (1 vote cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)
The Markets Have Changed; Time to Change the Way You Invest?, 10.0 out of 10 based on 1 rating

Tags: , , ,