As I look back on 2012, it was a fairly volatile year in the stock markets, with an especially frustrating last few weeks of December. That said, it turned out ok with the S&P returning 11.53% – not a bad year after all.
As I look forward to 2013, I thought it would be prudent to go back to some basic precepts in terms of managing volatility – the key being to expect it as part of the process versus letting it keep you up at night. Keeping in mind tried and true concepts in terms of your financial life can be helpful to remember when the going gets a little tough. So I present the following principles not as immutable laws, but as gentle reminders. They have guided me well.
First and foremost – please try to avoid looking at your account every day! With the convenience of the internet, gone are the days of quarterly statements and reviews; this has its disadvantages in that routine volatility can create havoc on your peace of mind. Generally, we know how our accounts are doing as a result of market news – and unless something in your life has fundamentally changed, a quarterly, or even annual, review, is generally sufficient. Consider for a moment if you knew the daily value of your home, you would not be likely to bail based on the ups and downs of the housing market – although recent years have challenged this thought process a bit, the idea remains valid.
Second and foremost – diversify. Or more simply put, don’t put all of your eggs in one basket. Diversify among asset classes (stocks, bonds, cash). Diversify by industry (health care, technology, retail goods for example). Diversify by country (there are plenty of good opportunities outside of the US). Diversify by risk (some investments by nature will have more risk than others).
Third and foremost – it’s about time in the market, not timing the market. Anyone who has built their own wealth can tell you it is a slow and steady- the turtle wins the race process. True wealth is built over time with patience and perseverance.
High fees and expenses will eat into your returns, and thus your nest egg. Many people are not aware of the fees associated with investing. While fees are a necessary part of any transaction, financial or otherwise, it is prudent to pay attention to any fees and make sure they are in line with the averages.
Most folks don’t invest to become rich; they invest so they don’t become poor. Individuals invest in stocks to provide enough income to maintain a reasonable standard of living that will also keep up with the rate of inflation. Bonds and cash may have more difficulty accomplishing this.
Having to pay taxes should not prevent you from selling a stock. Let’s say you bought a stock for $50 and 14 months later it was worth $100 but you decide to continue holding it and forgo the $50 profit – less $10 with a 20% capital gains tax, this would have net you $40. However, if the stock drops by 10 percent, to $90, and you sell for a $40 profit – less $8 with a 20% capital gains rate, you’ll now net $32. Taxes are generally inevitable, unless you die and leave your heirs a step up in cost basis; however, making a decision to sell involves additional considerations.
People often underestimate how long they will live after retiring and how much money they will need. Continued increases in longevity are having major impacts on retirement planning – a failed retirement is running out of money before running out of time.
Emotions, not logic, often influence investment decisions. Fear leads to panic, and panic leads to the inability to distinguish between a temporary and a permanent decline in portfolio value. Voices of reason, such as “stay the course” and “I’m in it for the long-term,” can easily go by the wayside when emotional impulses are screaming “sell, sell, sell.”
Prudent investment decisions are based on careful analysis of your time horizon, risk tolerance, expected return and asset allocation preference. Expect to spend some time in analysis, preferably with a trusted advisor who can help with all the nuances of investment planning. A good advisor will always spend time collecting your information and discussing your goals and dreams as part of this analysis process.
These simple, plain vanilla principles may not revolutionize the financial world or make the best-seller’s list, however, they have withstood the test of time. I hope you find them helpful, and that they remind you to stay the course as you continue to navigate through your personal financial life.
Kristi is a local independent financial consultant with 30 years in financial services. She is a registered representative with and securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. She can be reached in Gilroy at 408-848-0874, or Hollister at 831-634-1144, or at www.kristiellington.com.
