Technology stocks are a hot topic, from Google, to Amazon to Yahoo to the latest IPO. Many people in retirement are wondering if these stocks should be included in their portfolios, or to what extent. If you are already in retirement, you know you do not want to earn it all over again.
It is important to be prudent. However, a good return on investments may mean having a more abundant retirement life. Do technology stocks increase the probability that you will meet your goals? Do the recent changes in the Dow Jones Industrials signal the demise of such venerated corporate icons such as Chevron, Sears and Union Carbide?
The most important advice I can give you is to keep the focus on your own personal financial goals. Nothing matters more than whether you do or do not achieve your goals. It doesn't matter if the economy is racing ahead if you are not making it. It is also possible to be reasonably secure in times of turmoil. You either have enough money or you don't. You either take the vacation or you don't. Investing is a tool to reach these goals, not an end in itself.
The starting point for this investment decision is asset allocation. Asset allocation means deciding how much you want to hold in the various asset classes, basically stocks, bonds and cash. Cash? Hold cash for stability and liquidity. How much cash you need is individual. You do not want to sell stocks to meet basic or even extraordinary living expenses because the prices on any given day are too unpredictable.
Bonds? They are an important counterbalance to the stocks for several reasons. Bonds have no theoretical zero. They provide an historically reasonable rate of return. They provide your portfolio with income and stability. The risk of default may be extremely small, as with US Treasuries. Bonds will provide you with the staying power to remain invested in your stock market position through the most difficult times.
The prevailing 'wisdom' states that a 100% stock market portfolio is reasonable if you simply buy and hold because it will always recover and eventually overtake bonds in return. I say, the index may recover, but will you reach your financial goals? For example, stock market data will show you how after the 'Great Crash' the indexes recovered in about 15 years, soaring to new heights. These statistics ignore the fact that it took a stalwart stock like General Motors 30 years to recover its stock price. It also took the high tech darling of the day, RCA, nearly 30 years to return to ground zero. If you were planning to retire during this time, you would not have reached your financial objective, plain and simple.
Another thing about this 'index' theory of stock market recovery is this. These indexes are not fixed. They are not the unmanaged, passive indicators of 'life as we know it' as they are portrayed. The indexes succeed because they change. If your investment strategy is going to succeed, it has to be managed and updated constantly to reflect the changing economic environment in which you are operating.
We look at the statistics and see that the indexes in fact recovered in the 15 years after the 'Great Crash.' But do you understand that only half of the 30 stocks in the Dow Jones Industrial Average in 1929 remained in the average throughout the 30's? The other half of the stocks were dropped from the average, many because they went bankrupt. The financial effect of holding these stocks, the big names of the day, is not reflected in the statistics.
The decision to balance your portfolio between stocks and bonds is a most important precursor to deciding which types of stocks to purchase. It is the stability of bonds which allows us to take the risk inherent in stocks and to achieve the superior returns which pull our portfolios up. This mixture increases the probability that your individual financial goals will be met, regardless of the vagaries of the market. We still do not know how the market will perform during the next 20 or 30 years of your retirement.
The recent changes in the Dow Jones Industrials do seem to indicate a changing of the guard in the economy. As of November 1, the Dow dropped Sears, Goodyear, Union Carbide and Goodrich and replaced them with Home Depot, Intel, Microsoft, and SBC Communications--a dramatic shift towards technology stocks. This managing of the index itself is an important clue to the nature of the economy we are investing in. It says quite loudly: technology stocks have taken their place in the economy and cannot be ignored.