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Investment Consult: The lessons I've learned


During my years on Wall Street, I've learned many lessons about investing and financial planning. Here are the most critical ones.


Investment Consult

By Lewis J. Altfest, CFP

The lessons I've learned

Boring industries are often most rewarding.

Compounding is a powerful tool.

Buy as much house as you can afford.

During my years on Wall Street, I've learned many lessons about investing and financial planning. These are the most critical ones:

Investing on impulse can be fatal. Making quick investment decisions based on emotion, current events, or industry hype invariably leads to poor results. The late 1990s brought the most recent run of "can't miss" investments: Internet- and technology-related stocks. While it lasted, companies that had little or no earnings (Amazon.com and Priceline.com, for example) saw their stock prices soar. Meanwhile, less-trendy ones like General Mills and Whirlpool delivered solid numbers but didn't reward investors. This leads us to the second lesson:

Speculative bubbles can last a long time. I'll admit that it took much longer than I thought it would for the dot.com bubble to burst. Until it did, I had a heck of a time convincing my clients to stick with fundamentally sound companies in "boring" industries. But ultimately, doing so saved them and us a bunch of headaches.

Believing the prognostications of "experts" and "gurus" is foolish. Stick with the plan that you and your financial adviser have set for yourself and ignore the urge to follow the prevailing "wisdom."

Compounding has a greater impact than you think. Most people know about the value of compounding. What they often don't realize, however, is how much returns can vary, given different rates of compounding.

For instance, according to Chicago-based Ibbotson Associates, a dollar placed in long-term, high-grade corporate bonds at the end of 1925 grew to $82 by year-end 2002. That's a compound annual growth rate of 5.9 percent. Bump it up to 10.2 percent the rate for large-company stocks over the same period and that dollar grew to $1,775! Not only does this argue for contributing to a retirement plan as early as possible, it also bodes well for stocks as a long-term investment.

Stock prices move logically over long periods. The challenge for investment advisers like me is to convince people that a buy-and-hold strategy, when applied to good companies, will pay off over the long haul. Avoid being trigger-happy when it comes to selling your stocks, and you'll do fine.

Real diversification protects you. Some people pay lip service to diversification; others ignore it entirely. When I was young, I, too, used to load up on investments I was fond of. But now I know that if you spread your assets around among foreign and domestic stocks, different types of bonds, real estate, companies of different sizes and in different industries, etc. you'll have a portfolio that can weather any market downturn.

A home is a good investment. Owning the roof over your head provides substantial tax advantages and a good hedge against inflation. And real estate will continue to be a great long-term investment. That said, now may not be the best time to buy, because prices seem vulnerable in many markets. (See "Investment Consult: Have real estate prices peaked?" Feb. 21, 2003.) But once prices drop, buy as much house as you can comfortably afford, if you don't already own a home.

With age comes wisdom. Youth makes you cocky, a risk taker, and too often a poor investor. When you're older, whatever you give up in moxie you more than gain in patience and experience. Young investors can learn a lot from their seniors.

Now, if I could only convince my son of that.

The author, a fee-only financial planner, is president of L.J. Altfest & Co. (www.altfest.com), a financial and investment advisory firm in New York City. The ideas expressed in this column are his alone, and do not represent the views of Thomson Medical Economics. This column appears every other issue. If you have a comment, or a topic you'd like to see covered here, please submit it to Investment Consult, Medical Economics, 5 Paragon Drive, Montvale, NJ 07645-1742. You may also send a fax to 201-722-2688 or e-mail to meinvestment@medec.com.

Lewis Altfest. Investment Consult: The lessons I've learned. Medical Economics Apr. 25, 2003;80:20.

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