YOUR INVESTMENT STYLE CAN SIGNIFICANTLY IMPACT YOUR INVESTING SUCCESS
Photo credit to: Dominic Wade @ Flickr
What is your investment style? While the investment industry has long-touted the benefits of the”buy and hold” investing style, few investors can absorb multiple ten-year periods of portfolio losses.
Now more than ever it is important to learn the basics of personal finance including different investing styles. Nobody will look after your financial interests like you will.
Do you even know your investment style? Are you asking “what is an investment style?” You may have heard the terms, “buy and hold”, or “actively managed”. How about “sector rotation”? Each of these refer to a particular style of investing and many other styles exist as well.
The point I want to make is that if you adopted one of the most popular styles, and the style that many investors fall into by ease, you probably lost money during the past ten years. The “buy and hold” strategy is most often adopted by investors with little experience in the markets for two reasons.
First, it requires little effort. Just choose your initial investments and hold on for the ride during both up and down cycles. Hope for the best, and pray that time works to your advantage and not your detriment.
WHY WON’T YOU DISCUSS THIS WITH YOUR SPOUSE?
Another reason this method is so popular is that many inexperienced investors listen to inexperienced, or lazy, investment professionals and buy into the industry sales pitch that the stock market has always goes up, and stocks always outperform other asset classes over long enough periods of time.
For years the investment sales community has told investors that, over the long run, the stock market always goes up. This was evidenced by a statistically questionable analysis of a relatively short period of time representing American Stock Market history since about 1925. But it looked good in graph form because the line representing the stock market did, generally go up.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
The decade ending December 31, 2009 proved that the stock market can go down, go down hard, and stay down for a long period of time. Given enough time, the market may go up and continue it’s long term direction, but that is little comfort if you are near retirement and have lost 30, 40, 50% or more of your investment portfolio.
If you invested with a broker/adviser or through your 401k or IRA and blindly held during this period, you probably saw a large percentage of your portfolio value evaporate. You may want to educate yourself to more actively review your investments, understand them, and feel confident making changes in the direction of your investments.
To be fair, there is no guarantee that any investment style will perform better than another. Investment professionals, differ in opinion on which strategy is best. Most investment advisers that actively manage money for investors will charge a fee to do so.
ARE YOU A VICTIM OF INVESTOR NEGLECT?
On the other end of the investment style spectrum you can simply invest in passively managed index funds that require little investment experience but may perform like the stock market, even when it goes down. As an investor you need to understand the basics of stocks and bonds and the impact of economic and political environments on your investments.
While you may not find day-trading to be a prudent investment style, you may still want to review and adjust your investments more frequently than every few years. Even though it might have been impossible to avoid all losses from the economic downturn of 2007-2009, even a modest understanding of finance and economics may have assisted investors in minimizing their losses.
How much money do you want to lose while “holding” on? The Neglected Investor will assist you in growing your knowledge of investment and finance fundamentals so that you can either become self-reliant when reviewing your investment portfolio, or better understand the recommendations of investment professionals you may work with.
If you know of others who may need to increase their knowledge of basic financial matters, please invite them to visit The Neglected Investor.