Sunday Musings: A Scared Investor

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Reader Dick sent in the following email:

I am 72 and retired with about 90% of my portfolio in Vanguard midterm index fund and a smattering in short term equity fund and core fund.

I recently read a book “Aftershock” which scared the hell out of me, and I have been looking into Gold bullion and ETFs – specifically GLD and IAU. Should I dump the bond funds and go heavily into gold ETFs and bullion or would you suggest more into bullion or more into ETFs?

I really enjoy your weekly advice and desperately need your help.

Dick’s comment is very typical of the ones I have been receiving lately. Whether it’s a drastic response to the recent WSJ article about the impending bond bubble or other media scare tactics. I first wrote about the effect the media has on individual investors back in 2002 in “
Your Worst Enemy to Successful Investing—The Media.”

While I have not read “Aftershock,” keep in mind that whatever it was that scared you in that book is only one man’s opinion—the author’s. He’s probably forecasting as to how certain economic events will play themselves out. As I have commented before, any kind of forecasting is a very shaky business; it can turn you into a national hero, if you are correct, or if not, you may have to join those in the unemployment line.

Here’s my take when I hear stories like this.

Dick seems to have a majority of his assets in some mid-term bond funds, which is a good position to be in. Since I don’t know which one, let me give you an example from my advisor practice.

A new client came aboard in April 2009. One of his existing holdings was VBIIX, which has remained in his portfolio to this day. This fund has gained about 13% since then, plus another 5% in dividends, giving my client a total return of some 18%.

Let’s assume that reader Dick is in a similar situation. If he now applies my trailing sell stop discipline for bonds (5%), he would reduce his gain to about 13%, should bonds suddenly reverse their current uptrend.

That to me would be the only reason to sell the position and ring the cash register. He should follow that same process with all of his holdings. To me, to simply liquidate because of a book he’s read, is being emotional and can have adverse effects in case the predictions turn out to be wrong.

Following the trends, whether you’re buying or selling, will keep you on the right side of the market. Following scare tactics or simply negative press will put you in a vacuum and give you no basis for making sound and solid long-term investment decisions.

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