Question: More than six months have passed since the tragedy at the World Trade Center. How should I manage my money for the future?
Answer: According to Ric Edelman, author of "Financial Security in Troubled Times," if your savings and investments are diversified and based on your goals, do nothing.
Most of us know the golden rule of investment, "Buy low and sell high," but too many people do the opposite – buy when the market is doing well and sell when it goes down. This doesn’t mean that most of us are stupid; however, it does mean that it is easy to respond to news on television and in the financial press telling us that, in bad times, we must act immediately to protect ourselves. Remember that a good, diversified plan means that, over time, winners will outperform losers. Invest for overall return and not potentially large short-term gains.
This is how a diversified plan works. Let’s say you have $10,000 to invest. If you invest all of it in certificates of deposits, or CDs, for 10 years at 5 percent interest, you’ll have $16,289 at the end of the decade. If you invest all of it in one stock, at the end of 10 years you will have more or less than your $10,000 investment – a risky proposition.
A better strategy is to diversify by dividing your $10,000 into five sums of $2,000 each. For the first $2,000, you invest in a CD paying 5 percent. For the second $2,000, you invest in a treasury bond paying 6 percent interest. The third $2,000 is invested in a balanced mutual fund that has an average 8 percent return, and the fourth $2,000 buys a stock mutual fund averaging 12 percent per year. For the fifth $2,000, you invest in an Internet stock but lose it all. At the end of 10 years, the diversified portfolio will earn you $17,370, which is $1,081 more than the example where you put all of your money in CDs at 5 percent. And remember that, in the diversified example, you lost $2,000 from your Internet stock investment.
Diversified investing is a means to reach your financial goals, but even a diversified plan won’t be the right thing to do forever. Reevaluate and make changes in your investments as your life changes or your goals change.