|
E-mail this page to a friend!
Guarding Your Wealth for Seniors
The Solution to the ‘Investment Roller Coaster’
by Jeffrey D. Voudrie, CFP
Dec. 13, 2005 - Does investing put you on an
emotional roller coaster? If so, you are not alone. The fluctuations of
the market are hard for most investors to stomach, and many suffer from
financial ‘motion sickness’ as a result. But making investment decisions
under these circumstances is a recipe for disaster. Read on to find out
how you can get off the emotional roller coaster of investing.
If you feel that you are on the investment roller
coaster—if you lie awake at night worrying about your investments or get
a knot in your stomach when you hear the markets have fallen—then you
most likely have not allocated your portfolio so that it matches your
emotional risk tolerance. Changing the allocation of your portfolio
should alleviate this problem.
Investors find themselves on an investment roller
coaster when their ‘intellectual’ risk tolerance doesn’t match their
‘emotional’ risk tolerance. This creates a ‘fear/greed’ cycle that
causes many investors to constantly adjust their portfolio based on
short-term circumstances instead of a long-term strategy.
For instance, an investor intellectually agrees
with the benefits of equity investing and he decides to put a
significant percentage of his money into stock market-based investments.
But when the market starts going down, fear grips him and he can’t take
it. He wants out.
Once the market recovers, his fear turns to greed.
The market went up, so why didn’t his account? He blames his advisor for
not telling him to buy, when in fact the investor didn’t act because of
fear.
Don’t get me wrong. There is nothing wrong with
tactically reducing the amount you have invested in equities to protect
your money. That’s exactly what my proprietary money management system
is designed to do. But in this case, I am talking about rapidly changing
the long-term strategy based on normal market fluctuations.
The problem isn’t necessarily that the investor
panics and sells, but that fear then keeps them from getting back into
the market when they should. Instead of buying when everyone else is
afraid, they wait until the market recovers and it’s too late. They sell
low and buy high.
Let me give you a real-life example. After meeting
together countless times, one of my clients agreed that having
approximately 40% of his portfolio allocated to high-quality equities
was the best way to help him achieve his goals. We talked extensively
about the implications, did extensive research on each investment used,
and invested the money.
Within a couple of months, this client was beside
himself because he had lost $20,000!
But let’s put this loss in perspective. Although
the market was down several percentage points, his account was down less
than 1%. If you can’t tolerate a fluctuation of 1% then you shouldn’t be
in equities.
We reduced his equity percentage down to 7% so he
could sleep at night. By the end of that year, the market was up 8%.
Most of that gain (as it usually does), came very quickly in a short
period of time. And it started (as it usually does) right when nobody
thought it could go up.
This client allowed the fear over a 1% loss to
prevent him from achieving an 8% gain.
You will only know your true emotional risk
tolerance after it has been tested. When tested, we learned that this
client’s emotional risk tolerance was much lower then expected. Only
then were we able to achieve the appropriate portfolio allocation.
That’s why it is so important that you have the
ability to easily make changes to your portfolio without significant
cost. That’s why I so adamantly oppose investments that have surrender
charges—they cause you to lose your flexibility.
Also, your comfort with investment risk will change
over time based on your experience and your situation. This client is
becoming more comfortable with normal market fluctuations. We are
increasing the percentage he has allocated to equities, but we are doing
it slowly.
Recognize that your emotional risk tolerance is
probably much less then your intellectual risk tolerance. Start slowly.
Build up over time. Be flexible. And work with an advisor who
understands and is able to help guide you along the way.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or go to
www.guardingyourwealth.com. You can also reach me by email at
jeff@guardingyourwealth.com.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Please
visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
Guarding Your Wealth for Seniors are
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens. Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
protected from spam bots.
Click here to Search SeniorJournal.com for more on
this subject
Click to More Senior News on the
Front Page
Copyright: SeniorJournal.com |
