Years ago I worked with a company that had a cold calling bull pen much like what you see in the in movies. One of the managers would call clients and say “I have terrible news for you!” And what followed was an effort to encourage the client to buy or sell. After a period of time, I recognized that was not the place for me. I learned a lot about people while at that company. First, people are moved by fear. In that time I met with an elderly client that had just lost $10,000 on her investment. I was young and toting the company line. I tried to explain why she had lost money and how everything would be OK. She looked me square in the eyes and said have you ever lost $10,000? I lived through that meeting to learn that investors have a justified concern to be afraid of investing. People can and do lose money. So should investing be avoided? For some the answer would be yes, some people should not be investing in stock based investments. But for a great number of people investing in stocks and bonds is still a good idea.
In the past month, stocks and oil have been losing value, so how can I say that investing is still a good idea? Just as in life, there are no guarantees. However, history has shown that over many years investing in stocks and bonds can outpace the cost of inflation and yield better results than a fixed account. To wisely invest takes planning. You don’t have to be a Wall Street wizard; you just have to employee simple strategies to protect yourself. Here are five simple ideas that can help you reduce the volatility of investing.
- Know why you are investing: retirement, college savings, caring for a disabled child, etc. My family loved to go to Disney. We’d spend hours trying how to figure out how we could get the most out of the week we would spend in Orlando. Most people spend more time planning for a weeklong vacation than they do for retirement that could last more than thirty years. Make plans and review them every year.
- If you are new to investing, choose a mutual fund. Avoid single stocks for now. In a nutshell, mutual funds are pools of stocks or bonds. Some are professionally managed and some are not such as index funds. How much you pay for your mutual funds or the fees charged is very important. Generally the level of fees should reflect the level of service you receive. If you’re new to investing paying a little for advice might not be a bad idea. If you’re not getting service or don’t need it, lower fees are better. Most mutual funds that are purchased through employer plans will have higher fees. This does not make them bad. Employer plans have many more maintenance requirements and sometimes cost more.
- Diversify – don’t put all your eggs on one basket. If you are going to diversify make certain you are not buying several of the same type of mutual fund. I once had a client that had 28 different mutual funds. Yes she was diversified, but half of the funds were similarly invested. Aggressive individuals will have a larger percentage in stocks. Conservative investors may have no money in stocks. Still be cautious not to put all of your money into one type of fund. If you think that bonds are safe, understand that if interest rates go up, bond values go down. Determine your investment personality and let that guide you in choosing the percentage of money you invest between conservative and aggressive. There are funds that will manage the allocation of your investment for you such as lifestyle funds or target funds. It is your job to review these and see how well the fund is meeting your expectations.
- Dollar cost averaging. I often am asked “is now the best time to buy?” I have no idea when the best time to buy is, so I suggest that people buy all the time. Plans that invest or withdraw money on a monthly basis will give investors a tool that can help them better manage the risk of investing. Imagine if you bought a stock at $12 and it went down a dollar each month for six months and then back up a dollar a month for the next six months (it ends at $11). If you invested a hundred dollars a month, did you lose or gain? At the end of the twelve months your $1,200 would be worth $1,529. The average price was $9. This is a simplification, but the idea is you never know when the best time to buy is, so buy all the time.
- Rebalancing is a simple concept that will take some volatility out of investing. If you make gains over a period of years you will progressively be increasing the risk on your total mix of investments. By rebalancing you stabilize or lower the risk of investing. This is very helpful when there are large swings in stock prices over an extended time.
Investing is not a perfect science. Make a plan and review it every year. Turn-of-the-century American humorist Will Rogers had a saying that fits here very well. “Even if you’re on the right track, you’ll get run over if you just sit there.”