Are You The Intelligent Investor You Deserve to Be?

When it comes to your money, I want you to be a survivor. As you can see in my table, stocks have declined by over 30% three times already in this young century, and I’m talking about blue-chip stocks in the Dow Jones Industrial Average. When we look at the tech-laden NASDAQ and the S&P 500, declines have been far more precipitous—declines as high as 68% and 55% respectively. Moving forward, your job will be to survive the wreckage. I’m here to help.

In my table below, you’ll see the performance of the Vanguard Wellesley and Wellington funds during these tumultuous periods in history. The allocation of the former is roughly 60/40 bonds/stocks, while the latter is 40/60—an equal combination of the two is about 50/50 bonds stocks. (Note: I prefer buying individual stocks and bonds today to control dividend yields and maturity dates.)

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Click to enlarge.

We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50-50, between the two major investment mediums. According to tradition the sound reason for increasing the percentage in common stocks would be the appearance of the “bargain price” levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgment of the investor the market level has become dangerously high.

These copybook maxims have always been easy to enunciate and always difficult to follow—because they go against that very human nature which produces that excesses of bull and bear markets. It is almost a contradiction in terms to suggest as a feasible policy for the average stockowner that he lighten his holdings when the market advances beyond a certain point and add to them after a corresponding decline. It is because the average man operates, and apparently must operate, in opposite fashion that we have had the great advances and collapses of the past; and —this writer believes—we are likely to have them in the future.

Action Line: You NEVER want to be in the interest rate prediction business. Follow the guidelines illustrated above and chances are you’ll Survive & Thrive.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.