Daily Herald | Posted: Saturday, July 26, 2008 11:00 pm
For years, I've been pushing a "boring is better" approach to investing -- the kind of strategy that adheres to the belief that so many of us make the wrong decisions when the markets are in turmoil. We're better off deciding on an asset allocation, filling up the baskets and checking it monthly -- not every day.
I still believe that this is precisely what most individual investors should be doing. It's what I am doing myself. But I also know that at times like these, it can be tough to tune out the noise. And a great deal of that noise is coming from the Federal Reserve.
Whether the Fed is holding Open Market Committee meetings or a Federal Reserve governor is giving a speech, you know by this point the press will be out in force. It begs the question: Should we really be letting the moves of the Fed play into our master plans? The answer largely depends on whom you ask -- and what kind of investor you are.
• If you're hands-off. For the novice investor, trying to read the Fed is a lot like trying to predict where the markets themselves are going to go. You can end up driving yourself crazy, and if you don't know what you're doing, you can lose some money in the process.
As I mentioned, the majority of investors, myself included, take a long approach. We put our money in the market with the understanding that there will be ups and downs. We do this because history has shown that if you stick with it over the course of 10, 20 or even 30 years, you'll come out ahead in the end. It's a sound strategy, and one that can surely pave the way to a comfortable retirement. It also means that you can pretty much put the blinders on in the short term, says Jim Cramer, host of CNBC's "Mad Money."
"There is a sizable cohort of people who don't have the time or inclination to look at their investments, and for those people, this is just a side show," he says.
But there is one thing you might want to pay attention to when it comes to the Fed's meetings, says Doug Roberts, founder and chief investment strategist for Channel Capital Research Institute and author of the new book "Follow the Fed to Investment Success," (Wiley, 2008). "Are they reacting to the situation -- are they addressing the problem? As long as they're paying attention, that's really all the long-term investor should be looking at. They'll eventually find a solution to the problem." Having time on your side means you can wait it out instead of panicking.
• If you're hands-on. When you're investing with the goal of making a big return in a relatively short period of time -- six to 18 months or so -- you want to be more in tune. That doesn't mean you need to spend every single day neck-deep in the news but certain details become important.
"When the rate of inflation is higher than short-term interest rates, it means the Fed is tolerating inflation. This usually happens during war or a period like now, where the unemployment situation is pretty bad. During those times, small cap stocks tend to do much better than large cap stocks like the S&P 500," Roberts says. This means that if you're holding an ordinary index fund, as many investors are, it might make sense now to shift from a large-cap index fund to a smaller-cap one that tracks the S&P 600. "Small cap index funds, which track small cap stocks, are actually out performing the S&P 500, which is primarily a large stock index, for the year," explains Roberts.
• Either way, don't forget to protect yourself. Even if you're totally hands off, you want to re-evaluate your plan every year or so to make sure that you're still on track for when you plan to retire (as you get older, you want to be less risky with your investments because you'll have less time to recover if the market goes awry). And if you're aggressively investing for the short term, it's a good idea to also have a back-up plan. One way to balance things out is by holding two portfolios, a strategy that Cramer himself employs. One is geared toward a long time horizon, and isn't touched despite changes in the market or economy, and the other holds what he calls his "mad money," and is for short-term investments.
• Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today Show" and is also a columnist for Life Magazine. She is the author of 2004's "Pay it Down! From Debt to Wealth on $10 a Day" (Portfolio). To find out more, visit her Web site, www.jeanchatzky.com.