Monday, October 19, 2015

Investing is full of risks, just like life

Many people frequently go online to check the status of their investments. Still others review their portfolios on a monthly basis with their traditional paper statements. But no matter how you keep track of your numbers, it was indeed a rough third quarter for most investors.
Several pundits believe this is the beginning of a long overdue bear market. Other experts feel we’re still in the late stages of a bull market and this past quarter was simply a breather before the climb continues.

The reality, of course, is that nobody can be certain what tomorrow will bring. This is true not just with investments, but with life in general. No matter who you are, your life can change in a heartbeat.
While risk can’t be eliminated, it can be managed. That’s why we strap in our kids and buckle ourselves up when we get into a car. That’s why virtually every piece of machinery, all our medicine bottles and everything else we own that has an instruction manual, clearly explains that improper usage may cause harm, injury or even death.

In other words, we all face a multitude of risks every day. At some point in our lives, most of us have fallen off a bicycle. I have never met anyone who stopped riding a bike because of it. Nor do I know anyone who quit driving because of a fender bender.

But, with money it’s different. Investment risk is a horse of a different color. And the biggest reason, in my opinion, is emotion. Money makes it easy for our emotions to take control of our brains. And when that happens, my experience has been that long-term results are rarely positive.

For example, during the 2008-09 recession, some may have moved their entire investment portfolio into cash. The initial move may have looked good and relieved some stress for a while.

But, long term, what if those monies remained in cash all these years, with interest rates barely above zero? My guess is that people who left their money safely in the bank would lag well behind those who rode out the recession and remained invested.

The bottom line is that most long-term investors should neither get too excited about a good quarter, nor overly distraught over a poor quarter. Most long-term investors are best served with a diversified portfolio that incorporates various asset classes.

Depending on the size of your portfolio, diversity might mean traditional domestic and foreign stocks and bonds as well as real estate and commodities.

Naturally, everyone should periodically review their investments and tweak them as necessary. It’s just common sense. But rarely do circumstances dictate abandoning your long-term strategy altogether.

Whenever investments trend downward, the Internet is flooded by the gloom and doom crowd selling their advice. They can’t predict the future. They’re playing on your emotions. Could the economic world as we know it could totally collapse? Sure. Anything is possible.

That being said, I believe that somehow, someway, our nation will get its financial house in order and the traditional investment methods that have historically rewarded investors will continue to do so.

Of course, the world will continue to change and I believe these changes will open the door and reward investors who stay with their long-term plans.

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