Your Investments: Received Hanukka gelt... Now what?

As both children and some parents receive cash, the question is what to do with the newfound bonanza.

By AARON KATSMAN
December 6, 2012 22:33
4 minute read.
Isreli currency.

Money cash Shekels currency 521. (photo credit: Reuters)

 
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With Hanukka approaching, gelt plays a central role.

As both children and some parents (especially those with generous in-laws) receive cash, the question is what to do with the newfound bonanza.

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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.

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 potentially can even 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 in Europe; rather, one should have exposure to Asian economies, as well as those in Central and South America.

Rebalance

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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 had multiple meetings with two prospects.

One hadn’t touched his portfolio since 1998, and the other was a couple that was so busy with their aliya process, that they said they would deal with their portfolio later. Well they made aliya in 1995 and apparently “later” arrived in December 2012! What was an appropriate investment allocation for a 30- 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 buy 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 them 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 couple. 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 recent financial crisis has taught us anything, it’s that we have to value money the way our grandparents did.

This means that 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 with savings. 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.

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!

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.

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