Reaching out to risk
You’ve done it. You stretch as far as you can and then thrust out your hand to grab something deep on a shelf. Often that works and the prize is in your hand. Sometimes it doesn’t and the object gets pushed further away, something gets knocked off the shelf, or you lose your balance and fall to the floor. The truly unlucky (or uncoordinated) manage to do all three.
Welcome to being human. We love our shortcuts. Even when we know about the negative experiences, we still expect them to work out. The same is true of our investing habits.
Two events are happening now that have a lot of folks reaching out to risk. First is the performance of a well-diversified portfolio last year. Those who balanced their large US stocks with smaller companies, foreign investments, bonds, and commodities woefully underperformed the S&P 500. Second, the places you usually go for safe, secure income like bank accounts, CDs, treasury bonds and money market funds seem to all be competing to see how little they will pay you for the trouble of owning them. Yes, they are safe, but their returns aren’t even keeping up with inflation.
This leads to a lot of disappointed, impatient investors. The answers to the dismal returns they’ve experienced are all around them. Yes, the industry that brought you the financial crisis is marketing (and often creating) ways to help you earn more money. Almost every one of them involves you taking more risk.
On the fixed-income side of things, funds and other products that invest in foreign bonds, high yield (junk) bonds, long-duration bonds, and the like are attracting a wider audience. On the stock side the answer is obvious: Put your money in mid- and large-sized US companies. The message is that doing what you’ve been doing is wrong—and last year proves it.
These are the same folks who want you to think long-term and to be patient with them when they have a bad year. Instead of listening to them, try this: Examine why you have been investing the way you do, see if your investing matches up to your goals, and if everything looks fine, stop trying to find an answer where there is no problem.
For example, the money you have stuffed into a couple of bank accounts earning close to nothing might look bad. But what if it’s for your daughter’s college in a year or two?
That diversified portfolio you build for retirement would have kept you a lot less sad back in 2008 than having all your IRAs in the stock market. Sure, when the market screams up like it did in 2014 you fall a bit behind; but it kept you out of the poor house during the financial crisis.
Don’t let what your investments have been doing lately mess up your (hopefully) well thought-out plans. You don’t want to reach out too far and have everything topple.
This article was published under the title "Know risk involved in big returns" in the Wichita Falls Times Record News on March 22, 2015.