The Greatest Risk to an Investor’s Portfolio is . . .
the investor! With the exception of last Friday, the past few weeks have not been much fun for the equity investor. However, I’ve been alarmed at some PF bloggers and readers who seem to be advocating selling some or all of their investments. Why? Because the mortgage crisis has spooked the market? So what? The fact is, selling on a down market and buying on an up market is the biggest mistake investors can make. So please consider these suggestions that may help you navigate the present storm without running aground:
Don’t Look: If watching your investments go down in price is driving you crazy, don’t look. Seriously. If the market is down, don’t check your investments online. I now check mine daily, but there was a time when this helped me sleep better.
Understand this Eternal Truth: If you miss the 10 best market days in a year because you are jumping in and out of the market, your returns will be dramatically lower than if you just stayed in the market. Now, there are some interesting articles about just how meaningful this statement is, which I’ll write about soon, but last week is a perfect example of this principle. If an investor had sold on Thursday as the market appeared to be going straight down, he or she would have missed Friday’s strong returns. The point is, you simply can’t predict what the market is going to do, so you shouldn’t try.
Are you afraid of the right thing?: I’ve read some interesting blogger posts about investing only in what your comfortable with. Ok, I guess. But if you’re saving for retirement, have many years to go, and are uncomfortable with equities, you’ve got a problem. You simply will not be able to earn the returns you most likely need by investing in cash equivalents and bonds. So what are you afraid of? Your biggest fear may be short-term (relatively speaking) market declines, when your fear should be not having enough money at retirement. The point is this–sometimes we are afraid of something and we darn well should be. Fear can warn us that we are about to do something stupid. Other times, however, fear can be irrational. Unfortunately, it’s not always easy to tell one fear from another. And here’s the tough part–you learn to tell “good” fear from “bad” fear from experience. You can listen to others, which can help, but in the end, you have to learn it yourself.
Read the Right Books: Books are no substitute for experience. However, they are a good place to start. One book I’m re-reading is Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. The first chapter looks at stock and bond returns since 1802! Understanding the history of the market, both its ups and downs, can be a good start to dealing with the fear of short-term (again, relatively speaking) loses.
- Listen to the Legend: Here are a few things Warren Buffett has said that my help: