`Let the good times roll” is not an investment strategy.
Yet with a reasonably healthy economy and six years of bellowing bull market on our minds, a lot of people are feeling invincible, acting as if the party will go on forever.
Intuitively, investors know good times will not last forever, but they make investment decisions based on their experience. For many people, that experience is limited to the ’90s.
“People are making decisions based on everything being positive, because they have never seen any real negatives,” says Judith A. Shine of Shine Investment Advisory Services, an Englewood, Colo., financial planning firm. “We don’t know how long this can go on–maybe for a long time–but it’s easy to get careless when you think the good times will never end.”
So, it might be time to focus on mistakes born from prosperity, or what people do wrong when the good times keep rolling. If you have made these missteps, it may be time to revise your thinking.
Chances are you have made a mistake during this raging, unabated bull market if you:
– Shy away from underperforming asset classes and overexaggerate recent top performers. If you understand the need for a diversified portfolio–one that includes companies of various sizes, domestic and international holdings, and both stocks and bonds–then this one should be easy.
Instead, investors say they know that their portfolio needs a fill-in-the-blank mutual fund to diversify, but they can’t pull the trigger on buying anything but the hot asset classes.
While the bull market has kept going, there have been cyclical changes, sectors that have gone from popular to downtrodden (or visa versa) over the last six years.
“Everyone wants to believe that it’s different this time, that the assets they just bought will never go out of favor,” says David H. Diesslin of Diesslin & Associates in Ft. Worth. “Success breeds complacency, and investors who simply throw everything they have at what has worked lately probably aren’t preparing themselves for whatever is coming next.”
– Increased spending, especially with long-term savings. When the financial plan assumes 10 percent annualized long-term returns and your portfolio produced double that in the last year, you feel flush with cash.
Bzzt. Wrong answer.
“People get deceived by how well they are doing on paper,” says Roy L. Komack of Komack Management Services Inc. in Natick, Mass. “They take out money for something special and figure they are still ahead and don’t realize what they have done to their portfolio. Their long-term return projections were made assuming there would be big years and bad years, and they will need the gains from the current times to make up for years when they don’t have those returns.”
If you don’t want to make the financial belt uncomfortably tight during any future downturns, don’t overspend now.
– Have made moves worried about what is going to happen in the next 30 or 90 days. No one denies that there will eventually be a stock market correction and some period of anything from no gain to big losses. Still, it is easy to blow a fuse on your long-term planning if you let short-run concerns dominate your thinking.
In late June, for example, the stock market began a short, swift decline. Fearing that this was the end of prosperity, some investors backed away, selling successful investments and heading for the safety of cash.
And then the market rebounded, surpassing all previous highs.
Ooops.
– Let it ride, unchecked. For most investors, the idea is to achieve a balance between riskier holdings offering fast growth and safer holdings designed to protect capital. In the current market environment, that balance has been disturbed; the fast-growth holdings have risen more quickly than the conservative portfolio.
“People forget to trim their winners and rebalance their portfolio so that it stays on course for their goals,” says Diahann W. Lassus of the advisory firm Lassus Wherley & Associates in Providence, N.J. “They don’t protect their gains and go off their plans and wind up being more vulnerable to a downturn than they need or want to be. Everyone should see if their portfolio needs to be rebalanced at least once a year.”
– Haven’t reviewed investments in relation to your objectives. A lot of investors simply want their portfolio to go, go, go.
But a diversified investment strategy is not designed to beat the stock market, it’s designed to deliver on hopes and dreams.
The bull market has put a lot of people closer to their goals. That requires re-examining investment strategy.
“Someone who was saving for their child’s college education in 1990 may have it paid for by now,” explains Ross Levin, a principal with Accredited Investors Inc. in Minneapolis. “Yet things have been so good they want to keep going. Now, instead of risking that their money won’t grow fast enough, they are risking that they could lose the money right as they actually need it.”
The market may have been an almost constant upper, but your time horizon is always a downer. Make sure that your investments fit specific needs and that your portfolio has not grown outdated with the times.
– Don’t understand why you bought each of your investments. When the market is strong and almost anything you can buy is going up, many people simply purchase investments based on numbers, rather than on the underlying assets. This represents a lack of planning, and it will become a problem when the market someday heads south.
Investors who buy by the numbers, using past returns as their primary guide, get antsy when the market sours. One of the key questions to determining whether any investment is worth holding during bad times is whether you would buy the investment again today. When past performance and the promise of big gains are the only reasons for a purchase, it is easy to fall victim to short-term thinking, bailing out for something that looks just a little better.
Instead of following a plan, this results in chasing performance. Even in prosperous times, people do this; advisers have countless stories of clients who threw out a financial plan to chase hotter returns, only to be disappointed because they arrived at the new investment a day too late to hit the jackpot.
Buy in for a reason and stay in for a reason.
