Are you unwilling to lose money on your investments? There seems to be a lot of that going around. I just got off the phone with Christine. She’s a hard working single woman who was upset with another investment advisor. She’s angry about losing $27,000 on her investments over the last 6 months.
I can understand how Christine feels. She’s a hair dresser and it takes a lot of haircuts for her to save that kind of money. The only problem is Christine’s analysis is flawed.
While she has indeed lost $27,000 over the last 6 months, when we looked at her accounts over the last 12 months (still a very short period of time), she’s actually done remarkably well. And since early 2008, she’s up over $40,000 on a $150,000 account. That’s pretty astounding – especially when you consider the kind of market we’ve been dealing with over the past 3 1/2 years. I don’t like to sing the praises of other advisors if I can help it but the truth is the truth. The advisor Christine is working with has done a great job.
Of course, that’s not to say her advisor is the right advisor for Christine (which we’ll get to in a minute). But when you review your investment performance (regardless of whether or not you use an advisor) it’s important to do so with the proper perspective.
The worst perspective you can possibly use is to look at your portfolio from the high-water mark. This is one of the biggest reasons why smart people lose money. If you look at the high point as “your money” and any amount less than that as a loss, you are asking for trouble. Again, I’m not making this argument in order to defend all the hard working financial advisors out there. Not at all. I’m trying to help you understand how to truly evaluate investment performance so you can draw correct conclusions. If you falsely determine that your performance is sub-par, you’re going to hop around from investment strategy to investment strategy losing money each time you do.
Another terrible way to evaluate your portfolio is to do so from the start of the year or even for the last 12 months. Investing really is a 10 year game. If you don’t have at least 10 years to invest, you shouldn’t be doing it. That’s because investment strategies, even great ones, often have extended periods of underperformance. Investments in real estate, the stock market or bonds have to be evaluated over at least 10 years.
Now I’m not saying that you should stick with your investment strategy for 10 years and ignore the results during that period. What I’m saying is that you will benefit by first being clear on what your investment time horizon is and then selecting a strategy that has performed well over many 10-year periods in the past. Look at the best and the worst 10-year performance and decide if it’s a good fit. Then, once you make your decision based on looking at the data, do it and let it go. Understand that what happens in any particular day, week, month or year tells you nothing. The data is useless (at best) and dangerous at worst.
Why do you have to lose money if you are an investor?
Because the only way not to lose money ever is to keep your money in the bank. And the bank’s returns stink. They always have and they always will. Even when the interest rates were very high in the 1980’s – real returns were abysmal. Inflation and taxes eat up most of the returns offered by banks.
No…bank deposits are not an investment. They are a great place to hold money until you are ready to invest again, but they are not an investment in and of themselves. So, if we agree that the bank is not a good place to invest, you have to consider the alternatives. Any and all other investments fluctuate in value. That’s the truth. So, the bottom line is, if you are investor you have to lose money. The critical thing is how you deal with it.
If you are unwilling to tolerate any loss at any time, you better start out with a lot of money because if not, you’re going to find it difficult to reach your financial goals. And if you are willing to tolerate investment losses, make sure you select a strategy that suits your financial and emotional needs. Be ready for those losses. Expect them and be grateful you understand them.
How do you feel about this? Are you willing to absorb investment losses? How have you changed your investment strategy over time? Why? How did it work out for you?
Rose says
Some parts of this article are very true. If you don’t have a long time horizon to invest in the market, you shouldn’t do it. You also shouldn’t freak out over every little jump or drop in the market, but assess performance over the long term – this is really the only fair way to judge the performance of your investments – no matter what/where they are.
HOWEVER, what you said regarding safe places to park money (“the only way not to lose money ever is to keep your money in the bank”) is simply NOT true. There are a number of places to put your money that are at least as safe as in the bank, but with better returns, and without volatility. For example – a good, well-structured annuity. Safe, guaranteed, with growth. For example – a good, well-structured whole-life policy. Safe, guaranteed, with growth, and value never drops. Please don’t tell people investing in the market is their only choice. It’s simply not true.
But thanks for the article!
Rose.
Neal Frankle says
Rose, thanks but an annuity is not FDIC and therefore not as safe as a CD.