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by Eve Kaplan, Certified Financial Planner(R)

Aesop’s “The Tortoise and the Hare” is a perfect metaphor for the way people go about investing their money. As you recall in the fable, the hare brags about his ability to beat the tortoise and is overly confident about winning. In the investment world, the hare is someone who thinks he or she is great at selecting “winners” and avoiding “losers.” The “hare” is your neighbor, brother-in-law or the person at a cocktail party who makes you feel small and inadequate when it comes to investing.

By comparison, the “tortoise” is a perfect stand-in for the kind of “slow and steady wins the race” approach to investing that has been proven to grow your wealth with greater certainty and less risk. There is no secret to how it’s done, but it requires a steady and relatively unemotional approach to investing, methodical steps and a willingness to be unfazed by market hype. A financial advisor can help or you can follow these steps:

  1. Map out your ideal portfolio (e.g. 60% stocks, 40% bonds/cash) and allocate your investments along these lines. Your portfolio should be consistent with your tolerance for risk and should be the “best fit” to reach your financial goals.
  2. Using this 60/40 portfolio, create “tolerance bands” that trigger rebalancing. For example, you allow stocks to appreciate to 66% of your portfolio (and bonds/cash to 34%) before you trim stocks and buy more bonds. On the downside, you allow stocks to decline to 54% of your portfolio (and bonds rise to 46%, if they are doing relatively well) before buying more shares and trimming bonds. There are no hard and fast rules for tolerance bands – someone else might set the 60% rebalance band at 70% of the portfolio and only rebalance (trim stocks, buy bonds) at that point.
  3. Skip chasing individual shares and pursue broad “asset classes”:  Avoid “stock picking” (the “hare” approach) and emphasize a good mix various asset classes, e.g. “large cap value,” “mid cap growth,” “international developed shares,” “municipal bonds” (in after-tax accounts) etc. Each asset class consists of hundreds or thousands of holdings through the beauty and convenience of mutual funds or Exchange Traded Funds. You smooth your risk in this way, and avoid getting dinged by a plunging share price. Yes, you also avoid riding an Amazon or Apple ever higher, but you have a smooth upward ride of shares overall because you’re diversified – and less nail biting along the way.  (Stock pickers will object and say they do better than the market but data prove otherwise).
  4. Outperforming asset classes (currently “US large cap growth”) do relatively well for awhile…but eventually they revert to the mean (do relatively less well as investors turn to laggards).  Laggard asset classes (currently “US large cap value”) become more attractive and start to perform relatively well as investors take profits on outperformers.
  5. Avoid market timing. The “hare” market timed by running ahead (and then resting under a tree – or getting temporarily out of the market) while the “tortoise” plods along at a steady pace. Not sure how to time investing a larger lump sum (e.g. 401k rollover to an IRA)? Do it in increments – invest ¼ of your funds every month for 4 months, or 10% of your funds every month, etc. Dollar cost averaging is the perfect way that 401k and 403b investors put money into investments – the same dollar amount each pay period.
  6. Avoid spending time with market braggards and shut out investment white noise. Life is short – spend less time around people who make you feel small (about investing, or anything else) and more time working on your “slow and steady wins the race” approach.

(C) Copyright 2018 by Eve L. Kaplan. All Rights Reserved.