Get Serious About Investing

Last Updated Sep 11, 2009 5:30 PM EDT

When it comes to investing, John Kazanjian, 48, acknowledges there's "a haphazard approach to what I buy." And his $60,000 retirement portfolio is now worth almost 50 percent less than it was before the 2008 market crash.

The owner of two Ann Arbor, Michigan, businesses for college students — a packing and shipping firm and a laundry service — John has another $42,000 in six mutual funds and in stocks, including Bank of America (BAC), Sirius (SIRI), and Fannie Mae (FNM), in a taxable account. “I have faith the stocks will come back,” says John, a former investment-club member. “When Bank of America was selling at $5.00 a share and Fannie Mae was cents on the dollar, these seemed like good buys.” (He was right — shares in both companies had tripled by the fall.) John’s wife, Michelle, 46, has $20,000 in two mutual funds and Berkshire Hathaway stock (BRK-B).

With mounting expenses for their five daughters ages 11 to 21, the Kazanjians have stopped contributing regularly to their retirement accounts. They also own a house in Florida that’s worth a lot less than they paid for it.

Licking their wounds after a brutal market crash, worried that they don’t have enough set aside for retirement, not contributing enough to their nest egg: Sound familiar? You may very well be in the Kazanjians’ situation, realizing that real estate and stocks are not the sure thing they once looked like, but not quite certain what will replace them. There’s no secret formula, but here’s a good start: Contribute regularly to a broadly diversified portfolio of liquid investments. editor at large Jill Schlesinger, a CFP, says the Kazanjians need to become more strategic about their investing, especially for retirement. She said they need an asset allocation that can better weather future market corrections and that includes assets they can sell when necessary. The first priority, however, must be to amass an emergency savings fund equivalent to six to 12 months of their living expenses.

“For purposes of this plan, let’s assume that the Kazanjians could sell their second home in Florida and net $200,000 after the sale, which would be a loss,” she explains. They would allocate a portion of the house proceeds into an emergency reserve fund of six to12 months of living expenses, held in cash or cash equivalents. “I would err on the higher side because they are self-employed, so that would mean approximately $50,000.” Schlesinger’s advice:

Quick Fixes:

  • Forgo stock picking. “There is no data to support the idea that individual stock picking can beat the relevant index, so why bother?” says Schlesinger. She urges the Kazanjians to invest more in low-cost index funds, such as the Vanguard S&P 500 Index fund John already owns, for broad diversification.
  • Redeploy the retirement assets. Taking into account the couple’s risk tolerance (low) and time line (fairly short), Schlesinger devised a balanced portfolio that is mostly comprised of funds that hold large-company stocks and high-quality bonds, but also sprinkles in some less-traditional asset classes. Schlesinger believes that the Kazanjian portfolio will get a boost from commodities, as well as two mutual funds — one that holds stocks in the emerging markets of Asia and another that owns health care stocks. Her rationale for each:
  • Commodities: “While some believe that commodities, specifically gold, are used as a hedge against inflation, that is not the reason to add them today because inflation is not the problem now,” says Schlesinger. “However, when the world exits the trough of the recession and begins to grow again, economies will need energy. And I like gold as a long-term hold because the metal is still in a structural bull market.”
  • Emerging Asia: “It is already clear that emerging Asia has weathered the global recession better than the rest of the world,” she says. “Now, the region that has excess savings should lead us toward growth. It is important to note that this is a volatile holding, but while it bounces around, the longer-term trend appears firm.”
  • Health Care: “With 46 million previously uninsured people entering the health care market, there will be money to be made.”
  • Make it automatic. Schlesinger says the Kazanjians should rebuild their retirement portfolio by setting up automatic investment plans. These let you prearrange to move a set amount of money each month from your bank into the mutual funds you designate. By going on autopilot, you don’t miss the money, and thanks to the magic of compounding, it will really add up.

John’s response:

“I appreciate the diversifying suggestions. I’ve never invested in some of these things before, like precious metals and bonds. So I sold everything and allocated exactly as Jill suggested.”

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