Stay The Course with Index Funds

08/12/2011 7:00 am EST

Focus: FUNDS

The aptly named investing coach Jeff Teach says it’s crucial for investors to avoid emotional decisions in volatile times like these. He says well-chosen index funds are good choices through both fat and lean times in the market.

Kate Stalter: We are talking today with Jeff Teach of Teach Wealth Management. Thanks so much, Jeff, for joining us today.

Jeff Teach: I appreciate you for having me.

Kate Stalter: I wanted to start out by framing this first question in the context of all the market volatility we have been seeing for the past several sessions. What do you see as important for individual investors to keep in mind, given what has been going on lately?

Jeff Teach: Well, I think investor behavior is one of the most important things to keep in mind, and emotions run rampant when the market gets volatile like this. People tend to panic when you see 600-point drops, and they call their advisor and say, “Get me out of the stock market,” only to be fooled by the next day, when the market goes up 430 points and they missed that return of the market.

So emotional investing can be really dangerous right now, and I think people really have to keep their emotions in check and just be careful. Think things out carefully.

Kate Stalter: What are some areas that you see as being pockets of strength right now? Given where the strength might lie, what is the best course of action for investors at this time?

Jeff Teach: I think the best thing they could do, if they haven’t already, is have an investment policy statement and to stick with that. Have some guidelines.

I am a firm believer of Eugene Fama and Ken French and their three-factor model. Basically what they are saying there is that stocks will outperform bonds, so if you want some type of return you have to own stocks. Then inside of the stocks, small caps are going to do better than large caps.

If you want a little more kick, you switch and have a little value in there, because value will outperform growth—over time, now. I am talking long term here, not day-in and day-out trading.

So I think those are some areas that people should be looking at, some of the small caps and some value in there.

Kate Stalter: What are some of the investment vehicles that you are using with your clients these days?

Jeff Teach: I use what are called structured index funds, basically through Matson Money, and we use Dimensional Fund Advisors down in Austin, Texas. They are the vehicle that we use.

What Matson does is, they structure the index funds to the client’s risk tolerances. We do a little survey on their risk tolerances and have some multifaceted questions that we go through to find out just how much stress they can take in a year. That is how we form their allocations through these index funds, and we structure them according to their risk level.

Kate Stalter: What are some areas right now that you believe individual investors should really avoid?

Jeff Teach: That is a tough one, and in our philosophy we don’t really call sectors and stocks. We don’t pick stocks, we don’t market time, and we don’t trade on past performance.

But if I was a betting man, I know the metals have been the hot topic lately and gold is just going off, maybe up to $2,000 an ounce. That might be an area to look at, but it can be just as volatile, if not more volatile, than any stocks.

So I don’t know if I really answered the question, but commodities are a hot area right now. I am not a day trader, and I would be afraid to jump in now. I might be more attuned to take my jewelry over to the jewelry shop and sell my gold.

Kate Stalter: Given what you have said here today Jeff, what do you believe is the hardest thing for individual investors to do right now? And maybe that’s exactly what they need to be doing, because it’s the hardest thing?

Jeff Teach: As I mentioned before, the emotional part of it and keeping that in check.

I had a hard time with the 600-point drop, and I have been doing this for 30 years now. I was there in October 1987, and watched helplessly as the market fell 22%. Here we just fell 6% in one day...but 22% in one day, at the time I didn’t know what in the world to do.

It is just keeping those emotions in check and staying the course. Think long term, things that you know that over time are going to be there in 20 years and not get caught up on IPOs, hot stocks, and things you hear at cocktail parties, and stuff that is working for somebody else, because you don’t know when they got in and you don’t know when they got out.

The key is really staying the course and thinking long term and not gambling with your money.

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