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Testing a Belief System
By Stephen J. Butler Archives

On my way to work some mornings, I enjoy hearing a sponsorship on National Public Radio for a company called NIA Creative, an advertising firm owned by friend and industry icon, Robert Godfrey. I asked Bob how he justified the expense from a business standpoint, and he said, "We encourage our clients to spend money on marketing, so I think it's only right that I should drink my own kool-aid."

For my part, I'm often asked what I do with my own retirement account money, so here goes:

My fundamental operating principal is that I still have many years, at least ten to fifteen, before I would be fully retired and beginning to draw down retirement assets. I don't see myself retiring until sometime in my late sixties or early seventies because I enjoy this work tremendously. Even then, I would not be cashing in the entire account so the balance of the principle still qualifies as a long-term investment.

The second basic fundamental is that I believe in maintaining a broad cross section of investment types in an effort to generate a composite result that I call "The Path of Minimum Regret." In the light of what has happened over the past three years, I must say that I'm experiencing a feeling of smug satisfaction. I would feel even better, of course, if I had sold out all my stock funds in the first quarter of 2000, but the clarion call to sell began as early as '96. Anyone heeding it would have lost out on the excitement of those magnificent back-to-back returns of '98 and '99. I wouldn't have wanted to miss that for anything. Even after the current downturn, the money I had in 1990 is worth four times more today.

The cornerstones of my retirement account are the S&P 500 index as well as the total market index. In theory, these funds offer the potential for the greatest gains with the least amount of risk. The reduced risk stems from the fact that these major indices include companies that represent both growth and value sectors of the style box. To a large extent, the performance of growth companies versus dividend-paying value-oriented companies is inversely correlated. What does this mean? Well, in 1999, Janus Twenty, a top growth fund, outperformed valued-oriented Van Kampen Comstock by 60%. In 2000, the exact opposite occurred. An even mix of the two would have generated about a 20% composite return. The average mutual fund investor, by comparison, would have invested in Janus Twenty after its 60% rise only to watch it cost them 30% in the following year. This is called "chasing last year's best performing fund."

Broad based index funds, then, perform an automatic function of generating that path of minimum regret, because they include stocks of all basic investment styles. To further diversify, I have invested roughly 20% of my assets in REIT funds to add some real estate to my portfolio. These funds have done well recently, but they were flat in the late nineties when everything else was shooting to the moon. REIT's pay a steady, otherwise taxable dividend, so the place to have them is within a tax-insensitive retirement account like a 401(k) or an IRA.

I also have some small-cap growth funds and a growth index fund which all offered a great deal of gratification in the nineties, but that has certainly plummeted over the past two years. In addition, I have incorporated an asset allocation fund, a fund type that uses a computerized economic model to adjust a mix between cash, stocks, and bonds. This is the closest investment I have to anything that is trying to "time the market," and the fact that I am inclined to use at all is an embarrassing admission to have to make. However, there is a human desire to want to believe that the market can be timed, and to the extent that I can't resist, I have at least hired professionals to make the decision.

In my IRA, where I can invest in individual stocks, I certainly created some excitement for myself. My wife talked me into buying a Japanese company that owned large portions of a globe Internet company that offers a branded network of services and other major computer-related businesses in this country as well as in Asia. I thought, "Why not?" It's a long-term investment that capitalizes on a slump in the Japanese market combined with what could be a major player in the computerization of the Asian third world. My investment went from $30,000 to $175,000 in a matter of a few months and convinced me that my wife was a genius. Today, the investment is worth $3,000. But hey, I'm in this stock and my marriage for the long term?a real long term. When it comes to investing in individual stocks, my mistakes are best dissected by the great book "Do You Want to Make Money or Just Fool Around" by John Spooner. For that matter, Spooner could probably write a good book on marriage with a vaguely similar title.

Meanwhile, re-balancing my account annually has had a positive impact on my results. In the late nineties, when my REIT component was flat and the growth stocks were booming, it threw my original proportions out of whack. I forced myself to sell some of the growth funds and buy more REIT shares to get assets back into something resembling an even 20% in each category. I must say that I resisted it like the plague. As simple as it may have been to get on the computer and make an adjustment, I just kept putting it off. Today, however, those REIT funds have saved my bacon.

When all the dust has settled, my losses for the past two years have been about 15%. Considering that the money in my plans as of 1990 has increased by about three times what it was originally, I'm not complaining. Contributions throughout the nineties also benefited from substantial gains except for those I made in '98 and '99. I'm still contributing, of course, and buying shares at today's low prices. It all boils down to planning my work and working my plan. Or, as Bob Godfrey would say, "Drinking my own kool-aid."