Investing
They key to effective investing is using the
right assets for the right reasons. You want to
invest in equities for long Time Horizons (think
college and retirement savings) and in fixed income
for short Time Horizons (auto and home purchases).
While that sounds simple - and for auto and home
purchases, it is - the challenge for your equity
investments is knowing when to change out of equities
and into fixed income as the time you will need
to spend the money you've been saving nears.
To address this challenge, I like "soft"
trigger points. By trigger points, I mean pre-determined
dates when you will decrease your equity allocation.
For example, you may plan to reduce the equity
allocation in your College Fund from 80% to 60%
on June 30, 2018 (a date chosen based on the ages
your children will be at that time).
By "soft" trigger points, I mean that
you will only pull the trigger on that reduction
if you equity investments have achieved a certain
threshold. If they have not achieved that threshold,
you do not sell them yet. This strategy allows
you to maximize the advantage provided by your
long Time Horizon. If you use a "hard"
trigger point, and sell your equities at that
point regardless of how they have performed, you
actually had a shorter Time Horizon than you thought!
My preferred threshold is that your equity investments
should have at least kept pace with inflation
during the period you owned them. To determine
whether or not they have met that threshold, you
need to know the amount of inflation there has
been during your investment period. You can find
it on the website of the Bureau of Labor Statistics
(part of the U.S. Department of Labor) using this
link: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
If you are invested in a fund that tracks the
S&P 500 Index, you can find the historical
performance of that investment using this link:
More Information:
Investing is a complicated discussion. For a
more thorough exploration of the issues involved
in investing and recommended strategies to help
you achieve for financial goals, read the investing
section of my book: If I'm So Smart…Where
Did All My Money Go?
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