What a Difference a Decade Makes

Ten years ago everyone was chasing the next hot stock. Equity markets were generating double digit annual returns and dot.com stocks were doubling overnight. Greed was running rampant in the psyche of investors and no one wanted to miss out on the next sure thing.

Fast forward to today and everyone is running for cover. The country is mired in a deep recession and major stock market indices have declined over 50 percent from their highs. Fear and financial paralysis seem to have set in with investors of all ages.

The gloomy economic numbers are sobering. Companies are laying off employees by the thousands. Scandals rock Wall Street to the tune of billions of dollars. Major corporations are teetering between bankruptcy and bailouts.

It is little wonder that investors are struggling with financial paralysis. Anyone who listens to 24-hour financial news networks is likely to find half the market pundits predicting one thing, and the other half something else.

With one eye on the grim economic news and the other on a portfolio that drops month after month, there is a tendency to think that everything is out of your control. That is your first mistake in surviving and thriving in this challenging climate and becoming a successful investor.

Despite all the bad news, you are in control of your financial future, and now is the time to move beyond today’s paralysis and take charge of your investment decisions. Why is this so important now? I am not saying it is an opportunity of a lifetime, but there is a good chance that stock markets around the world will generate some fairly attractive returns over the next ten years and beyond. Don’t let the next decade pass you by.

For Coffeehouse Investors, taking charge of your financial future means turning off the financial networks and tuning in to yourself and three simple principles you already know to be true, AND are in your control.

1. Save for a rainy day. More to the point, you need to build your own personal financial plan to address your short and long term goals. In doing so, you create an awareness of whether or not your saving and spending habits translate into a goal that is achievable. If not, what changes need to be made? You might not be able to make enough adjustments immediately to reach your savings goal, but at least you have created an awareness of the gap between today’s current saving and spending reality, and your future expectations. Then, when choices come up in the future, this financial awareness is at least present at your decision-making table.

2. Don’t put all your eggs in one basket. The key to building a successful portfolio and reaching your financial goals is to diversify your assets in such a way that you maximize your chances of achieving your goals with a minimum amount of risk.

Returning to that personal financial plan of yours for a moment, this document reveals how different rates of return impact the future growth of your portfolio. This analysis allows you to determine an approximate level of risk that is appropriate for you in relation to your goals, and how best to allocate your investments between stocks, bonds, real estate, and other asset classes to achieve that required rate of return.

3. There is no such thing as a free lunch. Because markets are relatively efficient, any attempt at beating the market through the selection of individual stocks or actively managed mutual funds is likely to prove disastrous to your long term financial health. The smartest way to build a globally diversified portfolio is through a line-up of low-cost index funds.

This investing strategy is at the core of Coffeehouse Investor portfolios. These low-cost, tax efficient investments are the surest way to maximize your return potential in any asset class over the long haul. Another benefit of this approach is that it eliminates the time and money needed to search out the top stocks and leading industries. Instead you can concentrate on those wealth management issues that matter most of all, like your financial plan, your asset allocation, and, most importantly, your saving and spending levels.

Ten years ago, investors were in a euphoric mood, driven by the false hope of a new economic model and sky-high stock prices. Somewhere along the way they forgot that future stock prices are much more dependent on current market valuations (price to earnings ratio) than current economic and political climates. In other words, high P/E ratios portend lower future returns and low P/E ratios suggest higher future returns.

Amid the current economic turmoil and steep stock market decline, your expectations of future stock market returns likely parallel your investing emotions; dismal and depressing. However, applying the same parallel of ten years ago, market valuations suggest quite the opposite is likely to occur, with equity returns equaling or bettering its long term average. Use this opportunity and these Coffeehouse Investor principles to build a successful portfolio AND get on with your life. Maybe it is an opportunity of a lifetime. Don’t let it pass you by.

Bill Schultheis is author of THE NEW COFFEEHOUSE INVESTOR: How To Build Wealth, Ignore Wall Street And Get On With Your Life (Portfolio/Penguin) and an Investment Advisor with Soundmark Wealth Management in Kirkland, WA. Email him at bschultheis@soundmarkwealth.com