#2 Diversification Won't Protect You

Forbes: The New Rules of Money

During the market meltdown from October 2007 to March 2009 the S&P 500 swooned 57 percent. Almost no sector or asset class was immune from the carnage. Warren Buffett once said, “Diversification is protection against ignorance; it makes little sense for those who know what they’re doing.” You’re not Warren Buffett? Then diversify, but remember that owning too many funds or stocks ensures mediocre results, not protection.

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The New Rules of... How do you thrive at a time when uncertainty is the only constant and age-old investment practices no longer seem to work? Here are 20 new rules for protecting your wealth and building your capital.

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#1 Buy and Hold ... These days buying a stock or fund and expecting to hold it forever can be hazardous to your wealth. A buy-and-hold strategy works well when markets generally go up for long periods of time. But it stopped working a decade ago. Says economist Gary Shilling: “You need to be a jungle fighter rather than an easy cruiser.” Monitor your holdings and be prepared to sell losers and buy into big trends.

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#2 Diversificati... During the market meltdown from October 2007 to March 2009 the S&P 500 swooned 57 percent. Almost no sector or asset class was immune from the carnage. Warren Buffett once said, “Diversification is protection against ignorance; it makes little sense for those who know what they’re doing.” You’re not Warren Buffett? Then diversify, but remember that owning too many funds or stocks ensures mediocre results, not protection.

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#3 Low P/E Doesn... Many adherents to fundamental analysis and value stock investing seek stocks with below-average price/earnings multiples and price-to-book values. These “accounting-dependent” fundamentals proved to be traps during the financial crisis, when liquidity wreaked havoc on asset values and earnings. Cheap stocks, including many financials—-ranging from Fannie Mae to Washington Mutual—-became a recipe for disaster, and many still languish today.

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#4 Taxes Are a K... With experts predicting equity returns will average just six percent per year, taxes will make a big difference in what counts most—-your aftertax return. Be strategic. Keep taxable bonds and high-turnover funds producing short-term capital gains in tax-deferred retirement accounts. Hold individual stocks in taxable accounts to take advantage of the low long-term gains rate and tax-loss harvesting. Hedge against higher rates by converting some of your traditional IRA to a Roth IRA.

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#5 Learn to Prof... Volatility isn’t going away. The average daily closing value of the CBOE’s Volatility Index has nearly doubled since the mid-2000s, and so far in 2011 the S&P 500 has swung more than one percent on 75 trading days. Turn volatility into profits. One way is to hedge your portfolio by taking a five percent stake in a VIX futures fund. Another way is to use wild, seemingly irrational moves as buying opportunities.

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#6 Watch the Pol... The new era of hypervolatility means that political news and events tend to move stocks much more than fundamental factors like boosting profit margins. For example, in early August 2011 a host of blue-chip stocks plummeted as the world wondered whether the congressional stalemate in the U.S. would cause it to default on its debt. Fundamentals are important, but pay attention to the politicians.

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#7 Pay Attention... Expenses and high fees erode long-term returns. However, a recent study of fund performance over the last 21 years by asset manager DAL Investment Co. shows that low expenses are not a good predictor of the net returns of mutual funds. Trading commissions? Competition seems to drive them lower annually. So avoid high commissions and excessive expenses, but unless you are a passive index fund investor, don’t let expenses rule your investment strategy.

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#8 Income Invest... A few decades ago only “mature” stocks paid dividends and only retirees bought bonds. Today, despite a near-zero interest rate environment, there are a slew of 5-plus percent income options, from junk bonds to energy partnerships. As for stocks, studies show that long term, dividend-payers outperform non-dividend-payers and are less volatile. Corporate cash coffers are flush. Companies are jumping on the dividend bandwagon. Intel offers a three and a half percent yield. Apple could be next. Embrace it.

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#9 Invest to Mee... You may be hearing this from your broker. It’s often used as a way to get you to buy annuities and other fee products that provide a guarantee of income. But there is a lot of sense in focusing on one’s specific income and capital needs rather than on beating the S&P 500. It’s not whether you beat an index, it’s whether you can afford life goals, like college or a comfortable retirement.

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#10 Mine Your Ne... The best hedge fund managers collaborate on stock ideas and research all the time. The web and mobile connectivity afford individual investors the same opportunities. Tap into expert networks ranging from LinkedIn to web communities like Value Investors Club with its in-depth research reports, and to ValueForum.com, a message board featuring mostly yield and commodity-oriented investors.

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The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
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