We used to tell a joke. I know, when you think “financial planner”, all you imagine is a group of suits clowning around, and general hilarity, right? Me neither. But, we did have a joke. Maybe you’ve heard it.
A woman walks into a financial advisor’s office. After leading a good discussion about her goals, the advisor asks what investments she’s using toward her objectives. She tells him she has CDs at Bank of America, Wachovia, the corner bank, and her credit union.
The advisor says, “why do you have the CDs spread around at so many banks?”
To which she answered proudly, “I’m diversified!”
Yeah, now you know why my wife never wanted to attend our work Christmas parties. We are cray-zee.
There’s a point here, though. Diversification is about much more than spreading your money around. Although there is a certain leap of faith when diversifying, that leap is far beyond where most investors begin to jump. There’s a ton of science you can perform before you throw your dart toward the target.
Many people begin with the dart. Gold sounds like a good idea. The guy at work l.o.v.e.s. small company stocks. Your boss has ridden Apple all the way to the top. Your cousin invests in rental properties and is making a killing.
These may all be fine investments, but none might reach the goal.
Different investments have performed better or worse depending on the time frame. Historically, the stock market has been a horrible place to invest for short term goals. Bonds have been wonderful during most five year periods. Still, both stocks and bonds have performed poorly over short time periods (such as a year).
One tool that advisors used well during my time in the field was an asset allocation tool. Luckily, you can find these all over the internet. With an asset allocation tool, you’ll find out what investments give you the historically least amount of risk with the greatest chance of return. These tools work very well for someone who’s new to investing, because at the least, they help you find a sensible approach to diversifying your money.
Tomorrow, I’ll have a few places for you to look for good asset allocation tools. For now, if someone would like to be Joe’s guinea pig, how long do you have until your goal? I’d love to have a real-live person to use as an example.