YOUR INVESTMENTS: What to do with your dreidel winnings

Forget about beating the market There is a lot of noise in the financial media about the need for investors to “beat the market,” pushing investors to strive to somehow get better returns than could be had by just tracking the market.

By AARON KATSMAN
November 28, 2013 23:21
4 minute read.
New Israeli Shekels

Money Shekels bills 521. (photo credit: Courtesy)

While various flavors of sufganiot grab the headlines, there is no doubt that money, or gelt, plays a central part of Hanukka. Whether you clean up playing dreidel (and I am not talking about chocolate coins!) or you have generous in-laws intent on stuffing your pockets with cash, the question is what to do with the newfound bonanza.

Should you use it to buy the latest gadget from Apple that you “just can’t do without”? Or, is there a better approach that will help your financial situation in the long run? Here are some tips that will help you become a better investor.

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Allocation Perhaps the single-most important aspect in growing wealth is to allocate your portfolio correctly. This means having the correct mix of stocks and bonds.

Your stock portfolio should have large and small companies, representing growth and value. Your bond portfolio should have non-US dollar bonds as well as a small percentage of high-yield and emerging-market bonds. This will help create a portfolio with lower volatility, and the smoother ride can potentially help increase returns as the portfolio can compound at a greater rate if there are no huge drops.

Think international With the US share in foreign equity markets constantly decreasing, and with much of the world’s growth coming from outside the US, international exposure is a must. While most allocation models call for 20 percent to 30% of a portfolio to be invested outside the US, I think that number needs to be closer to 50%. It’s important to note that I am not referring to investing 50% of a portfolio solely in Europe; rather, one should have exposure to Asian economies, as well as those in Central and South America.

I write in my recently published book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing: “As the global economic climate has changed, investors need to change the composition of their portfolios as well. While the United States should continue with decent growth over the next 12 years, experts predict that the rest of the advanced countries in the world are going to chug along at sub-2% GDP growth. Nothing to write home about. Now if you look at growth trends for China, India and the rest of the emerging world, growth rates are about double.”

Rebalance Buy low and sell high. That is the holy grail of investing. All too often I see portfolios that haven’t been touched in years. Earlier this week I met with a prospect. She hadn’t touched her portfolio since 1997, before her making aliya. What was an appropriate investment allocation for a 35-year-old is going to be different for someone who is 50. Additionally, due to market movements, your allocation may be way too aggressive or conservative than you originally wanted.

A yearly rebalance solves this issue. You end up selling assets that have increased in value and buying more of those that are trading at lower levels.

You get your stock/bond allocation back to the level that is right for you. Many studies have shown that regular rebalancing and strategic asset allocation is key to achieving solid investment returns, as opposed to trying to generate huge profits from excessive stock trading.

Forget about beating the market There is a lot of noise in the financial media about the need for investors to “beat the market,” pushing investors to strive to somehow get better returns than could be had by just tracking the market. This sounds all well and good if we were living in a vacuum and if the entire point of investing was to make as much money as possible. Unfortunately for many of us, there is a point to investing. That is to make enough money to help achieve our goals of marrying off children or paying for our retirement, just to name a few.

Most investors should have portfolios that have nothing to do with beating the market, focusing instead on meeting their goals and needs.

Save If the financial crisis of five years ago taught us anything, it’s that we have to value money the way our grandparents did. This means we need to save. If you receive a dollar, save 20 cents. This should be your first action. Then figure out what you need to buy.

The easiest way to build wealth is by saving. Investing is nice and highly recommended, but without savings, it’s going to be an uphill battle to be able to pay for the goals that you set forward.

Part of the Hanukka story is about the Greeks wanting to secularize the Jewish people; i.e., to forget about religious observance and embrace Hellenism.

Today we face our own challenges of Hellenism. If we are speaking in financial terms, this means the fight against overblown consumerism and the need for us to have more and more material goods. Let us enjoy a rededication and go back to the basic principles of investing and saving money.

Happy Hanukka!

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.

aaron@lighthousecapital.co.il Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.


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