Investing can be a scary proposition. You only need to reflect on the last big downturn — the 2008 markets and the Great Recession — to experience a bone chilling shiver. I don’t have a crystal ball. However, there seems to be a lot of -- to quote the 1990’s era Fed Chairman, Alan Greenspan – irrational exuberance out there.
While it’s easier said than done, your goal as an investor is to steer clear of calamities that can wipe out your nest egg. You can’t control what’s happening in the markets or the global economy, but you can learn to ignore the inner voice that sometimes sneaks its way into your head. Ignore these messages to keep them from undermining your approach to investing.
“You are the master of the universe.” With our own investments, we tend to remember the triumphs and forget the tragedies. Don’t let selective memory lead to overconfidence and a riskier approach than is warranted.
“Stick with what you know.” Do your investments reflect this idea? Maybe you should broaden your horizons! I remember a couple I worked with for years. They had a large portion of their portfolio invested in the stock of their two employers. Despite my pleas, they were comfortable with the mix because they felt like they had inside knowledge of the goings on at each organization. It didn’t work out. His company hit financial hard times, the stock plummeted, the company downsized to cut costs and my client lost his job. Not only had his portfolio suffered, he no longer had an income.
You can apply this diversification message to your portfolio, as well. The U.S. stock market represents about 40% of the global market. It would follow that a globally diversified equity portfolio would include a similar representation. However, most people focus their portfolios on investments based in their home country.
“Recent performance predicts future results.” Unfortunately, recent history tends to exert a bit too much influence on our decisions. When the stock market or a specific investment you’re evaluating has rocketed up for the last couple years, you might decide the trend will continue. On the other end of the spectrum, poor recent performance could deter you from building or maintaining what would otherwise be a sound portfolio or investment decision.
“You are a winner, not a loser.” We don’t like to lose, period. The result? We hold on to losing investments too long or get rid of winners too fast. Remember that a sound portfolio management routine includes periodic re-balancing.
“Don’t miss out.” Our fear of missing out on a good market can lead us astray. When that little old CD-investing lady walked into my office with a desire to buy technology stocks — her first venture into the stock market — I should have known things were about to turn. The herd was heading over the cliff! Don’t let the miss-out message throw you off course.
If you start to hear some of these messages, it could be a great time to work with an advisor to construct – and stick with – a strategy that reflects your life stage and your financial goals.
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