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Investing in Risky
Business... Page 2
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Our mistakes stay with us. Did you ever make a bad decision? Of course, and I’ll
bet you remember quite a few of them. As a matter of fact, most people remember their
mistakes far longer than they remember the good decisions they made. That’s why
people are inclined to hang onto losing investments, hoping they’ll come back to
their purchase price. If they haven’t sold, they don’t have to face their
mistake. That’s the premise for this classic story: On the way to the race track one
gambler turns to the other and says, "I sure hope I break even today – I could
use the money."
Overconfidence is dangerous in boom times. In Lake Wobegon, says Garrison Keillor, all
the children are above average. In a roomful of investors, most of them will characterize
themselves as above average, and that can lead to excessive risk-taking. And when
investments in general have been moving higher, many people become overconfident. They
attribute their portfolio growth to their astute strategy rather than to the investment
climate as a whole.
There’s a saying on Wall Street that in an up market, everyone’s a genius.
Remember the stock market crash of 1929, when almost everyone was leveraging their way
into the stock market. The crash was so devastating it ruined the economy for many years
to come.
So where does that leave us today? Many investors vacillate between wanting to make a
killing on tech stocks and worrying that the stock market is overvalued and due for a
crash. When the market goes up, they lament that they don’t have enough invested, and
when it corrects, they are upset they didn’t pull out sooner. It’s important to
recognize that the market ebbs and flows just like the tides. At high tide, you can enjoy
the surf, and at low tide, it’s time to relax and enjoy the beach. Here are three
tips to weather these volatile times.
Remember why you invest. The greatest risk for most investors is not meeting their
goals. The best way to overcome that risk is to consider their time horizon for investing.
If you need money for a new home next month, or next year, the stock market is a risky
place to invest. Certificates of deposit are far more appropriate, where your capital is
guaranteed. But if you need money in twenty years for investment, certificates of deposit
are the riskiest investment, and stocks are the most appropriate. Though there’s not
guarantee of your principal, time will overcome the ups and downs of the market, and the
rewards will outweigh the risks.
Maintain reasonable expectations. If you don’t expect too much, you’ll
always be pleasantly surprised, my parents used to tell me. And that’s good
investment advice as well. If you count on a continuing 20% investment return each year
when you plan your retirement or your college savings, your plans will be scuttled by a
down year. But if you count on a more reasonable 8% – 10% return for long-term
investments, bad performance in some years can be offset with good performance in others,
keeping your investment train on track.
Add money over time, not all at once. For most investors, it is less risky to invest
smaller amounts of money, and add to the investments on a regular basis over time.
That’s called "dollar-cost averaging" and in general it results in lower
cost of investments and higher returns, as you buy the dips. This strategy also can help
more timid investors get used to the ebb and flow of the market, allowing them to dip
their toe into shallow waters before they take the plunge.
The Women's Institute for Financial
Education (WIFE) is a non-profit organization which provides financial education,
networking opportunities, seminars, and workshops for women of all ages. |
