A Minute With...

investment expert David Sinow

8/31/2011  8:00 am

David Sinow has managed money for more than 25 years, founding a financial planning company and full-service bank before joining the College of Business in 2001. In an interview with News Bureau Business & Law Editor Phil Ciciora, Sinow, a clinical professor of finance who teaches classes on stocks, bonds, securities and wealth management, offers advice on how to handle the seesaw nature of the current market.

What advice do you have for average investors who have most of their retirement money socked away in a 401(k) or an Individual Retirement Account?

image of professor david sinowFirst of all, don’t panic. Second, continue to invest a set amount each month or each year into your plan. If you’re close to retirement and you’re planning to take funds out of a 401(k) or IRA, make sure that you have decent liquidity, and by that I mean enough money in short-term bonds and money-market type assets where if you have to take money out, you’re not forced to sell stocks.

Are wild swings in the Dow Jones industrial average the new normal?

We’re certainly going to be encountering more wild swings in the Dow so long as regulators aren’t clamping down on rapid-fire computer trading, which now represents 60 percent of all trades on any given day. It’s robo-trading based on an algorithm, where you have a computer that is trading basically thousands and thousands of times a day, trying to earn maybe a hundredth or a tenth of a cent on each trade. As long as that type of high-frequency trading is allowed, then we’re going to see substantial daily swings in all of the major indices, whether it’s the Dow, the S&P or the Nasdaq.

Is this a good time to pause and think about rebalancing one's portfolio? How often should the average investor rebalance?

The average investor should rebalance at least once a year. To rebalance more than that, you would have to have a very good reason for changing your overall asset allocation. And why would you change your asset allocation? Maybe you inherited some money that’s already invested in a stock portfolio, and suddenly you’re flush with stocks. In other words, you ought to have a really good reason to rebalance. There have been many academic studies that show that rebalancing once a year is really just as good as trying to rebalance all the time.

The best example of that is the huge institutional S&P 500 index fund run by Wells Fargo. They rebalance every day, and the transaction cost of rebalancing every day costs more money than rebalancing once a month or once a year with the same index. 

What should those who are retired or near retirement do during these turbulent times?

The biggest mistake people make going into retirement is becoming far too conservative with their investments by rushing out of stocks and putting everything in fixed-income investments.

In retirement, your biggest financial enemy is not whether equities go up and down. Your biggest enemy is the erosion of purchasing power through inflation. If inflation is high, your purchasing power could be halved in 15 to 20 years. Since most people who retire in their 60s live into their 80s, that’s something to watch out for.

So you are really short-changing yourself if you suddenly, wholesale, sell your stocks when you retire and move into fixed income. Especially in today’s world, where there’s virtually no return in fixed income. One of the few long-term investments that has kept up with or outperformed inflation is a diversified portfolio of stocks.

Even with all the fluctuations in the market, is this actually a good time to buy?

Yes. The best times to buy are when the markets drop 10 to 20 percent, and you continue to exercise your strategy and contribute to a retirement account. Especially if you’re younger, because you have to remember that this is a share accumulation game, not a price accumulation game.

People love to buy stocks when they’re expensive, but you really want to buy when shares are less expensive because then you’re buying more shares. So if I could buy a blue-chip stock at $50 per share instead of $100 per share, I’m buying more shares, assuming I’m going to invest the same amount of money. The reason you want to accumulate as many shares as possible is that most stocks pay dividends. Historically, about 40 percent of a stock’s returns are dividends.

So he or she who ends up with the most shares at the end of the game – they’re usually the winners.

 

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