Where to Invest 2009: Back to the Basics

"If I have even just a little sense, I will walk on the main road and my only fear will be of straying from it." ~ Lau Tzu 

The meaning of "Back to the Basics" in this post title is not exactly the conventional meaning of the phrase, which would suggest that we have abandoned the basics and now is the time to return to them.

Should we not always stay with the basics in the first place?  If we left them behind, why did we do it?  Just what are the basics, anyway?  And what is it that we have abandoned?  Have we lost our way as investors or could it be that we have lost ourselves?  Should there really be any distinction between what we do and who we are?

"The average man doesn't wish to be told that it is a bull or a bear market.  What he desires is to be told specifically which particular stock to buy or sell.  He wants to get something for nothing.  He doesn't even wish to have to think." ~ Jesse Livermore

Ironically, my annual "Where to Invest" category of posts have been among the most popular, in terms of site traffic at this blog, especially as a result of search results.  In other words, many of my blog visitors this time of year will be searching for "Where to Invest in 2009" and are not likely coming to this blog site to think or to be presented with questions -- they are likely coming to look for quick, easy-to-follow answers and instructions on making more money than most people over the next 12 or so months.

If this describes you, then you may need these posts more than anyone... and I invite you to stay and have a look around -- you just may discover that what you want and what you need are opposing forces...

If you do not already know this, you will need to do your own thinking at this blog site.  You will not find any lists, such as "Top 10 Best Stock Moves to Make in 2009."

Finding a way to quickly and conveniently cash in on this financial crisis is arguably the same line of thinking that got us into this mess to begin with.   

Furthermore, prudent investing does not need to significantly change from year to year or across various economic environments.

"Moderation, which consists in indifference about little things, and in a prudent and well-proportioned zeal about things of importance, can proceed from nothing but true knowledge, which has its foundation in self-acquaintance." ~ Plato

The market and economic events in 2008 have certainly, at least for me, shown a powerful and illuminating light on the values and virtues of simplicity, moderation, patience, frugality, contentment and self-acquaintance.  These virtues are my fundamental definition of the basics.

Higher returns are always welcome but should not be the primary goal.  A prudent investor does not aim to "beat the market" or they may place undue risk on investment assets, which, thereby, may potentially undermine the investor's life goals.

This is the essence of risk management.  We focus on those things that are within our control and spend little time and energy on those things we cannot control -- in both personal finance and in life.

The greatest control determinants of successful portfolio management, therefore, will be discussed in detail in my "Where to Invest 2009" posts to follow, which will include:

• Asset allocation:  Unbeknown to the vast majority of investors, investment selection is not the most influential factor in investment returns -- it is asset allocation!  I will demonstrate how to build the closest thing to a perfect portfolio possible, which is an allocation of investments that will achieve average to above-average returns in bull markets, but most importantly for greater long-term performance, will minimize losses in bear markets.
• Asset location:  Location, location, location!  If you have a tax-deferred account (IRA, 401k) and a taxable account (individual or joint brokerage), the location of investments can have a tremendous impact on overall returns.  Essentially, I will give examples of how to minimize taxes and how to leverage the appropriate investment(s) for the various types of investment accounts used by the average investor.
• Savings rate:  How much, how often and when to contribute (or invest in) the selected investments has a more meaningful impact on long-term returns than does the actual investments themselves.  We do not just "buy and hold" and "dollar-cost average" as conventional wisdom suggests -- we buy and hold but also buy more when prices are attractive and re-balance on a periodic basis -- otherwise, we open ourselves to the possibility of a "lost decade" of investment returns.
• Expenses:  High expenses will slowly and effectively erode at long-term investment returns; therefore, it should come as no surprise that keeping costs low is one of the greatest controllable determinants of higher long-term returns.
• YOU:  Of course, a blog site with a name like The Financial Philosopher, will not overlook the greatest controllable determinant, not only of financial success, but of the greatest success achievable -- the one that is the purpose of investing in the first place -- the path to a meaningful existence, which may only come by knowing yourself intimately.

"He who has a why to live for, can bear almost any how." ~ Friedrich Nietzsche

My "Where to Invest 2009" category of posts may be more aptly named "how to invest" or even "why to invest."

In fact, if we make an honest attempt at defining the reason why we invest our money, we may then proceed to the how and where; and there will be no need to attach a year to it -- the investment strategy can fundamentally be applied to any year.

I would like to take this opportunity, therefore, to discuss not what investors want, but what they need, which is to be encouraged to think as a unique individual, not just one among the herd -- and to define the role and purpose of money in our lives in the first place.  This, in essence, is getting back to the basics...

I look forward to being your humble financial and philosophical guide for this series of posts and, more importantly, I look forward to learning from YOU -- one of my most valuable resources...

Comments

[andrew]

Looking forward to reading your posts

"You cannot teach anybody anything. You can only help them discover it
within themselves." ~~ Galileo (1564 - 1642)

I consider Dr Zeuss a great philosopher

“You have brains in your head. You have feet in your shoes. You can steer yourself in any direction you choose. You're on your own. And you know what you know. You are the guy who'll decide where to go.”

[Kent @ The Financial Philosopher]

Thanks, Andrew...

I agree with your sentiments on learning and education, which is why philosophical learning works so well.

Asking questions is much more illuminating and revealing for educational purposes than providing answers, which why I lean more toward the Socratic Method than the Rote Method of learning.

I also share your affection for Dr. Seuss!

"Education is an admirable thing, but it is well to remember from time to time that nothing that is worth knowing can be taught." ~ Oscar Wilde

[Justin @ FixThePig]

There is no doubt that we need to get back to the basics. There has been way to much greed over the past 5 years and now it's time to make sound investments again!

[Kent @ The Financial Philosopher]

Justin:

I agree; however greed will manifest itself into a new form once this cycle of greed ends.

Since we cannot control herd behavior, we should focus on our own, which would hopefully prevent any engagement with the extremes of greed in the next cycle.

Once again, the featured quote from Lau Tzu is a reminder that we should always try to stay on the main road and not stray from it. This is true in a life perspective as well as an investment perspective...

Thanks for the comment! I also enjoyed visiting your blog...

Cheers...

Kent

[Jeremy Day]

Hi Kent,

This is another great post. My question is what do you think of buying individual stocks that pay dividends such as coca-cola? They seem like a good solid investment right now.

Jeremy

[jesse mendez]

Hi how are you? I was looking through your blog and found it very interesting to me. As an artist here in Southern California I appreciate a variety of artistic expression.

Having said all that I would like to invite you to become friendly with me here in my San Diego blog, and comment.

You may also see that many of my labels are unique in artistic expression and always at least a music video and other aspects.

I hope you will stop by,
take care

[Kent @ The Financial Philosopher]

Jeremy:

I'm not a fan of individual stocks, primarily because I believe the proper diversification requires at least 20 holdings. If an investor is committed to doing the "homework" in selecting and monitoring the stocks, then buying individual equities can make sense.

Essentially, if the investor understands them self, they understand the investment and the given investment suits their objective, then it's difficult to argue with that logic...

Thanks for the comment...

[Kent @ The Financial Philosopher]

Jesse:

Thanks for your kind words. I share your appreciation for artistic expression.

In essence, everything contains an element of art and every person is an "artist" to some degree...

"All children are artists. The problem is how to remain an artist once he grows up." ~ Pablo Picasso

Cheers...

[S.JayRaman]

Nice to read your articles. Mostly,
I believe that the stock markets are driven by sentiments and insider trading. In spite of having the best brains in the management Why many banks and institutions landed in bankruptcy crying for governments help?.

[Andy]

Great post and agree with most of your points. From my perspective and recent post on this topic, cash or a broad based ETF is the best place to have your money in now and to make tactical investments throughout 2009.