On June 10, one of my MBA students wrote me this email:
Good morning Barb,
This is my first time checking out your site (very interesting). I am so confused on what to believe or even how to evaluate my portfolio. With the international stuff going on, BP oil spill, government legislation, mid-term election quickly approaching. I don’t know what to do. Should I strap in, hold tight and hang on for the wild ride or change my strategy?
Your student, BT
As we begin the new year afresh, you may be questioning your investment strategies. Here’s how I tackled BT’s question.
This is a “perfect” investing question. It requires one to ponder; does the present time require a special investing approach? I remember this same question appearing in the media at the end of the 1990’s at the height of the technology boom. Although at the end of the 90’s the question was, “With these incredible stock market returns are we in for a new era with super high returns going forward?” Clearly, that was not the case.
And during the thick of the recession, in 2008, the question of how to handle that situation rose again? An investing forum member even sold every one of her stocks. Many others followed suit and sold at the trough of the market.
Investors frequently wonder, should I get out of stocks because they are too risky, or stop investing in bonds, or avoid cash because the yields are too low? TB, my student voiced concerns that I’ve encountered on investing forums and from countless friends and acquaintance.
HERE IS THE ANSWER
Stocks and bonds are volatile. Historically their returns, especially stocks, are much higher (previous decade excluded) than cash. The reason for the additional return is because we as investors DEMAND to be compensated for the extra risk that stock investing entails.
The answer is very simple, only invest in stocks and bonds to the point where you can tolerate the volatility. The greater the percentage of stocks in your portfolio, the more volatile your investments will be. If you are distraught by volatility, reduce the percentage of stock holdings until you can tolerate the risk. Be aware that when you give up the volatility or risk, you also sacrifice the OPPORTUNITY for higher returns. You really must review the 20 Minute Guide to Investing for a handy “Risk Chart”.
Understand that over the long term, stock investments are very volatile and recently, that volatility has INCREASED. That said, if you don’t need your invested money for at least 5 to 10 years, it’s likely that you’ll be better off financially with at least a bit invested in the stock market.
I’ve found that after with greater historical information about risk and return, I expected stocks to be volatile, and became relatively calm during times of uncertainty.
In sum, don’t worry too much about the day to day volatility, if you are investing for the long run. As long as you have a sensible investment plan, stick with it. The constant news cycle will give you the chance to buy on the dips and increase your overall return!
How do you handle the ups and downs of your investments?
image credit: Iheartbeatles