Investments and
The Magic of Number Seven

Throughout history, the number seven has been considered a mystical or sacred number.

The occurrence of seven-or an exact multiple of seven-appears repeatedly in folklore, mythology, and religion. Moreover, in cultures throughout the world, the number seven is considered lucky and magical in nature.

A good deal of credit for the illusion of seven as a lucky number originates from its association with the contemporary game of dice.

Dice games, of many types, are considered some of the oldest forms of entertainment in the world. Games, such as backgammon, date back to the year 3000 BCE in Babylon.

The popularity of dice games escalated enormously in Roman times and became so pervasive that Emperor Commodius altered the Imperial Palace so that it could serve as both a brothel and a gambling house.

The objective was to raise money for his depleted treasury. Now ...

There's a practical idea for Governments to consider!

It is estimated that as many as thirty million Americans play dice games in a given year. This translates into hundreds of millions of throws of the dice where the players hope for a lucky seven on the first throw.

What follows is a throw of financial dice that is described as "seven essential factors that form the basis for every personal finance column that could possibly be written."

Under the headline, "The Seven Personal Finance Truths," Stephen Schurr, a senior editor at www.thestreet.com, maintains that all personal finance stories are variations on these seven themes. His advice is sound, so read on.

Story No. 1:

Diversify, Diversify, Diversify, or Mark Twain Was Wrong!

Schurr writes, "Of the seven personal finance stories, this is the simplest, the most important and the most often misconstrued.

Proper asset allocation is the key to long-term investing. Ibbotson Associates, an authoritative source on asset allocation, found that about 90% of the variability of returns over time is due to asset allocation."

Essentially, proper asset allocation is the predetermination to spread assets among several investment classes whose performances are not correlated. In other words, their prices do not move in tandem.

Schurr cites as examples large stocks, small stocks, bonds, international stocks, and real estate. The correlation factor among these investment classes is typically low, making them the ideal foundation for investors.

The danger of ignoring this advice was brought home all too clearly during the bubble bursting period of early 2000 when many investors were much too heavily represented in the two classes that had boomed in the late 1990's-large cap stocks and tech stocks.

Ownership of mutual funds, despite providing significant diversification among a large number of holdings, does not necessarily provide true diversification if, as an example, the holdings consist of an S&P 500 Index Fund and the Fidelity Magellan Fund.

Both are essentially large-cap funds and are closely correlated so they will move in tandem at all times. If you are heavily concentrated in just one or two investment classes, you can be assured that at some point in time, one or both will deteriorate in value, perhaps sharply so.

For those interested in long-term appreciation, Schurr cites what he terms the "long-term truths of diversification."

1. Stocks beat bonds, bonds beat cash.

2. Small stocks beat large stocks.

3. Value beats growth.

He does fail to emphasize that while these "truths" are valid over time, there can be long periods when the opposite occurs. So, by spreading investments over all categories, you will avoid the possibility of the burst bubble syndrome.

Story No. 2:

Know Thyself -- and Thy Portfolio!

The second "story" relates to what Schurr terms the three R's:

Risk, Returns, and Rebalancing.

Risk is determined by age, life changes, and personal tolerance for risk. Schurr cautions that returns are very unlikely to revert to the golden era that existed between 1982 and 2000 when the average annual return of stocks was 15.6%. He cautions it is probable that real returns will fall between the 5%-6% level.

Then, Schurr refers to the advantages inherent in rebalancing a portfolio in order to maintain the original asset allocation percentages.

Story No. 3:

It's Not About Timing the Market, It's Time in the Market!

Story number 3 is titled, "It's Not About Timing, It's Time in the Market." Here, he refers to the fact that a number of studies prove the most debilitating effect on a portfolio results from excessive trading.

He cites two studies, the first finding that "the average investor's $10,000 investment in mutual funds over 25 years would grow to $123,000 without any trading, but only $70,000 with trading."

The second study found, "from 1984 to 2000, that the S&P 500 returned 16.32% a year, but the average stock-fund investor had an average annualized annual return of 5.32%. The reason for the underperformance: active trading."

His point is that investors would do better by sticking to their original allocation strategy and adjust it sparingly. He also advocates dollar cost averaging as the best way to avoid the detrimental behavioral issues that occur in the investing process.

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