Your Investments: Investing with a crystal ball

Easy to predict the future, huh? Look no further than the latest five-day weather forecast to see how difficult it is

By AARON KATSMAN
Shekel money bills (photo credit: REUTERS)
Shekel money bills
(photo credit: REUTERS)
"Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.” Peter Drucker
It’s easy to predict which way the market will move, correct? I have been inundated with client emails with doomsday articles on how the stock market is about to crash – after all, the market has risen for five years in a row so it MUST be time for a crash.
Are you ready for the next big stock market move, either up or down?
We all hear stories about how so-and-so knew the market was about to crash and sold off his entire portfolio or someone else who knew exactly when the market had reached its low and invested everything he had and became a multi-millionaire.
Sounds easy, right? Wrong!
If it was so easy to predict a market crash, why have the doomsayers been consistently wrong in their crash predictions? They have been predicting a crash for three-four years with nothing to show for it.
Easy to predict the future, huh?
Look no further than the latest five-day weather forecast to see how difficult it is. Our trusted weatherman with the most sophisticated scientific instruments at his disposal can’t tell us what the weather will be two days from now.
Investors should draw on past experience – history – learn from it, and try and to create a plan based on current similarities. But don’t rely 100% on those similarities. Rather, use history as a guide and plan accordingly. With a little perspective, you can avoid the mistakes many investors make in both rising and falling markets.
Define goals
Investors should sit down with a pencil and paper and start to define long-term goals. Be specific. This will impact your saving and investing goals, as well. Then, invest your money in a way that will enable you to achieve the aforementioned goals.
Review how your assets are allocated. How are they broken up – international stocks, real estate, large-cap stocks, small-cap stocks, bonds, cash? Make sure you have a well- diversified portfolio.
Once you have defined your goals, understand why you have chosen certain investments. Diversified appropriately, you will be able to avoid common mistakes made during volatile markets.
Nothing goes up in a straight line
Investors often think nothing needs to be done to their portfolios when markets are rising, taking with them portfolio values. Unfortunately, even in advancing markets, mistakes can be made. It’s important to remember that markets don’t always move up.
For younger investors, market gyrations are less problematic. But, for retirees or those fast approaching retirement, the need to preserve capital becomes much more important.
Chances are that, once you hit retirement, what you managed to save is what you will have to live off of (in addition to pension monies and Bituach Leumi/Social Security); having a portfolio that is overly aggressive can blow up in your face if the market gets slammed.
Don’t forget about asset allocation.
The recent market upswing has been driven by certain segments such as tech stocks and dividend-paying shares. Make sure your portfolio stays in balance. For example, if you had 5% exposure to technology and after the run-up that’s increased to 10%, you need to pare back your holding.
When the market is strong, some investors lose sight of their long-term goals and only focus on how much they’re making in the short run. But if you start concentrating on the short term, you might take on more risk than you should.
Be patient. It helps to remember the most important rule of investing for retirement: You’re investing for the long term, not to get rich tomorrow.
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 both in Israel and the United States and author of the book Retirement GPS: How to Navigate Your Way to a Secure Financial Future with Global Investing.