It never fails. January and February are alwayslittered with Wall Street economists gazing intotheir crystal balls, offering up stock market predictionsfor the new year. So, which way is thestock market headed in 2005? For Coffeehouseinvestors, the answer is "We don't know, and we don'tcare." The direction of the stock market over the next12 months is far less important than the need to establishan intelligent investment philosophy and gameplan for the next 12 years and beyond.
How are you coming along in creating your ownfinancial game plan? Unfortunately, too many of usare caught up in a swirl of daily activities to bringtogether all the necessary information that will allowfor an analysis of our long-term financial goals. AliciaMunnell, director of Boston College's Center for RetirementResearch, summed up workplace retirementaccounts best when she said, "They are simply toocomplicated for people to handle. It's not that peopleare dumb. It's just that becoming a financial expert islow on their priority list." That's the understatementof the year.
The task of becoming your own financial expert canseem overwhelming at times, but if you have acceptedthis daunting challenge, a good place to start is byembracing the following three Coffeehouse principles:
The Coffeehouse investment philosophy is groundedin the simple concept of indexing (ie, owning mutualfunds that invest in the entire stock market or variousdimensions of the market). If you want to maximizeyour return potential in each asset class, index fundsare the obvious choice. Of course, the greatest benefitof embracing the Coffeehouse philosophy is that itallows you to focus your attention not on meaninglessstock market things that are out of your control buton the most important Coffeehouse principle of all:developing a long-term financial plan.
For most of us, our long-term financial goals arepretty simple. We want to be able to maintain a lifestylethroughout our retirement years similar to the one weare living today. Along the way, we are likely to have afew large expenses, such as supporting our parents,offering financial support to our adult children, or payingfor unforeseen medical expenses. The goal in creatinga financial plan is not to predict the future; the goalis to apply your best estimates of your financial situationtoday and make adjustments along the way.
Once you have gathered all the necessary informationthat goes into creating a long-term financial plan,beginning with your expected income and expensereports, you can then focus on the first Coffeehouseprinciple of diversifying your holdings betweenstocks, bonds, and other asset classes you deemappropriate. Ideally, for most investors, the objectiveshould be to minimize the allocation to risky assetclasses in pursuit of their long-term financial goals, adecision that cannot be made without first analyzingtheir long-term financial needs.
With all the activity that swirls around us each day,creating a long-term financial plan is not high on ourpriority list, but this year it should be. Instead of tuninginto the Wall Street fortunetellers for 2005, it's time totune in to yourself and your financial plan.
is the author of The Coffeehouse
Investor: How to Build Wealth, Ignore Wall Street
and Get On With Your Life (Longstreet Press;
1999). He is also an investment advisor with
Pacific Asset Management in Kirkland, Wash. He
welcomes questions or comments at 425-820-1769 or firstname.lastname@example.org. For more
information, visit www.coffeehouseinvestor.com.