Investment Strategies for the Long Term

Wisdom would lead investors to believe that asset allocation and a buy and hold philosophy are the most critical components in developing an investment portfolio.

Listed below are several studies that indicate the strengths of this wisdom:

· H. Nejat Seyhum, analyzed the 7,802 days from 1963 through 1993. He found that if you were out of the market during the best 90 days (1.2 percent of the time) that you would have lost 95% of the market gains. One dollar invested in 1963 would be worth $24 in 1993 if the investor had stayed fully invested. The same dollar would be worth $2.10 if the investor had missed the magic 90 days.

· Gary Brinson, Randolph Hood, and Gilbert Beebower reported the results of a study they conducted in the 1986 July-August edition of the Financial Analyst Journal. They concluded that 94 percent of a portfolio’s return could be directly attributed to category selection and weighting (asset allocation).

· Brinson, Singer, and Beebower, reported the results of an updated study that they conducted in the May/June edition on Financial Analysts Journal. They studied 82 major pension plans over a period from 1977 to 1987, the update overwhelming confirmed that more than 90 percent of the portfolio performance is attributed to asset allocation.

· William Sharpe and Harry Markowitz have conducted the most well known studies on asset allocation. They were awarded the 1990 Nobel Peace Prize in Economic Science for their development of the “Modern Portfolio Theory”, a strategic asset allocation model.

Peter Lynch: “My single-most important piece of investment advice is to ignore the short-term fluctuations of the market. From one year to the next, the stock market is a coin flip. It can go up or down. The real money in stocks is made in the third, fourth and fifth year of your investments, because you are participating in a company’s earnings which grow over time.”

Warren Buffet: “I do not have, never had, and never will have an opinion where the stock market will be a year from now.”

Sir John Templeton: “Ignore fluctuations. Do not try to out-guess the stock market. Buy a quality portfolio and invest for the long-term.”

With all of the above WISDOM mentioned, we are in need of some investment strategies.

INVESTMENT STRATEGIES. It is understandable for an individual to become confused and frustrated with investing for their future. In investment management, the real opportunity to achieve superior results is appropriate investment policies that position your portfolio to benefit from riding the main long-term forces in the market. In Ecclesiastes 11, Solomon gives us specific instruction concerning investing. Diversification becomes a key element in any well-built portfolio.

The five tested fundamentals of investing are:

1. Establish a safety net of cash and insurance

2. Get started early and accumulate money systematically

3. Minimize the impact of income taxes

4. Utilize strategies which can reduce risk and enhance return

5. Build a portfolio that makes your personal profile.

Avoid market timing, trying to guess when to be in and when to be out of the market. Historically, the stock market has had a large portion of its favorable returns over the other asset classes during short upward bursts. Between 1925 and 1996, a period of 852 months, if you were out of the market during the 35 top performing months – about 4.1 percent of the time – you would end up with a return similar to Treasury bills. (But remember, past performance is no guarantee of future performance). The message is clear. You cannot get stock-like returns unless you are in the stock market. Invest for the long term and be patient.

Money management is not easy, because without a very firm commitment to long-term investment policies within an asset allocation framework; it is easy for individuals to be distracted by investment schemes that promise high returns with little or no risk. The Church is a hot bed for get-rich quick schemes. Always seek council when something sounds too good to be true. It usually is. The bottom line is that no risk-free, quick and easy way exists to build an inheritance or retirement plan.

Note: T-Bills principal and interest are guaranteed by the U.S. Government.

Originally published February 13, 2002.