Recently while riding a Boston subway, I struck up a conversation with a fellow rider and for one reason or another I mentioned the "GOLDEN RULE". Surprisingly, he had no idea what I was talking about. Thinking perhaps it was due to a difference in age and was known to him as wisdom under a different title, I said "you know, 'do unto others as you would have them do unto you.'". To which he replied "Hmm, well that makes sense." Taken aback by the fact that this truism seemed like news to him it got me to wondering, 'could this be news to a lot of people, just a few, or was he just an outlier?' I Googled it on my cell phone and immediately was given a definition that it was a law of reciprocity, or a principle of treating others as you would have them treat you. 'Thank goodness', I thought, 'I haven't stepped through the looking glass.' Upon further reflection, it crossed my mind that the business of investing in publicly traded securities doesn't always seem to follow the "GOLDEN RULE". You can bet that your friendly neighborhood stock broker is caught in a dilemma when it comes to these sage words. Perhaps the golden rule of investing should be something along the lines of "invest for others as you would invest for yourself." The guidance RIA's (Registered Investment Advisor's) have with regard to this matter is referred to as the "prudent man rule" which states that he should invest  - "...with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims...by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so..." etc. That is a mouthful that bears some breaking down, and will, good readers, help me lead you to a nugget of investment gold. 

     Unfortunately, when you are in the business of selling things you aren't always interested in selling them at a price that you might want them sold to you. Your incentive as a commissioned sales or brokerage person is to get the sale to happen at the best price you can find. Following the golden rule isn't necessarily going to mean the highest price, and if you're a prudent "man"/woman there is stuff that you wouldn't consider buying at any price. That's where the "care, skill, prudence and diligence" part come into the equation.  If you invest for your clients like you invest for yourself, you will necessarily invest with "care", but "skill, prudence and diligence" only come with experience, training, and hard work.

     The guidance of the prudent man rule can also get tricky, "...under circumstances then prevailing that a prudent man acting in like capacity..." because it is hard to pin down exactly who this prudent man is, and under what circumstance he might be investing.  As the world found out after the banking disaster, men "of a like character and with like aims..." can really make a mess of things when they all lower their standards to earn fees. With a nod to Supreme Court Justice Potter Stewart, I can say about the "...circumstances then prevailing..." - I'll know them when I see them, because sometimes what is "prevailing" is panic or euphoria. So, there is no gold there. The nugget of investment gold to be found is where it says: "by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so..." and that is meant to mean "diversify" unless it is prudent not to do so, but it is clearly not meant to mean that it would ever be prudent to not minimize the risk of large loss.

Those of you who have read my newsletters for any period of time know I advocate for a well-defined and diversified portfolio primarily constructed of low cost index ETFs. Time has shown that this is a prudent and rewarding method of investing. Diversification is the nugget of gold, but there may be times when it is prudent not to do so. For example, if you are saving for a home or car. When your time horizon is relatively short by stock market standards (<5 years) a 100% in cash is prudent. Would investing 100% of your retirement savings in cash or Treasuries be prudent? No, because these are funds that will be drawn upon over a long period of time in relatively small discreet amounts, and because the value of cash and Treasuries are diminished by inflation. It is far better to suffer some stock market undulations in the value of your retirement portfolio rather than outliving it. The thing that makes those undulations bearable is diversification. A well-diversified portfolio will always have something that you can sell at a fair price, and with the benefit of time you will minimize the risk of "large losses" to a fraction of a percent.

While you contemplate the "GOLDEN RULE" of investing I offer a bit of wine & bread. Standard & Poor's has recently announced that they will be splitting off REIT's (Real Estate Investment Trusts) as a new 11th sector of the index. They will be split out from the financial industry and given their own sub index in the S&P 500 which will account for 3% or roughly a trillion dollars of market cap. That's about the same size as the telecom sector. REIT's have come out of the shadows of the investment world. Historically relegated to the small cap world, REIT's were known to be interest rate sensitive, run with sales and commission structures that resulted in management & shareholder conflicts of interest, and had poor board oversight. The REIT segment has grown up. It now offers positions in large, well-financed, and professionally run organizations that use sound business practice to manage diversified portfolios of property. Today most large REITs hedge their interest rate exposure, budget appropriate capital reserves for renovations and improvements, and offer dividends that are less likely to be cut unexpectedly. Practically all REIT 10k (their SEC required annual report) have exhibits that show how their income would be effected when and if interest rates go up or down. And, lastly REIT boards are doing a better job of mitigating the conflicts of interest inherent in a business that is internally driven by real estate brokers who may not always have their shareholders and the golden rule at heart when they pursue commission generating transactions. The VNQ (Vanguard REIT ETF) currently offers a dividend yield of better than 3.3% and recently has had a price pulled back of some 5%.  A good entry price is likely below $81/share or when the expected yield spread is 2% better than that offered by the ten year U.S. Treasury (currently 1.6%).  Because REIT's are taxed differently than regular stocks you should consult your accountant. But if it makes sense you might consider it for a small portion (<5%) of your portfolio to enhance yield and add diversification. If the Federal reserve raises rates in December you may get a chance to buy it then, as the market will no doubt have a short term over reaction.