By: Mike Mesch
In the midst of today's market, how does anyone know who to trust or what to do with their money? How does anyone ever feel comfortable trusting their money to an advisor again with the fraud we have recently witnessed on Wall Street and all the bailout packages being doled out?
If we come out of this mess with any lessons learned, I think we can all agree that common sense must prevail during these times. Many of us overextended our credit and took advantage of inflated home values. The "big 3" automakers continue to follow a financial formula that has not worked for some time and a lot of seemingly very intelligent people gave their money to an investor; Bernard Madoff, who allegedly invested in nothing more than a bevy of nice homes, vehicles and other extravagances as opposed to the market.
So how does common sense prevail? Keep in mind this advice is coming from someone who has made some poor financial decisions in his life (my first investment I asked my parents for $500 to buy a stock that tanked within 3 months - there is still tension today). I am not carrying stone tablets down from the mountain here, but I think some tried and true advice needs to be revisited.
First, THINK LONG TERM. We have all heard this one before and there is a reason, it works! I am going to split you up into two groups; those of you who can leave your money in the market for fifteen years plus, and those with less than fifteen years to invest. The first group generally can afford some market corrections. A recession like this can have an impact on the market for years, but if history is an indicator, the market will prevail and move ever upward. Over a long-enough time horizon, most of our portfolios should recover and then some.
The second group should not hit the panic button. In fact, let us throw away the panic button. We do not need it. That being said, these individuals should review their investments with their advisor and see if any moves are necessary. Your advisor can help you determine your risk tolerance (bonds versus stocks) and help put your mind at ease by coming up with a sensible plan. Keep in mind we should all meet at least annually with our financial advisor anyway to review our portfolio, so this one is easy.
Next, BE CONSISTENT. "Pay yourself first", "automate it", whatever your buzzwords are, the theme behind this advice is continue to invest. I will take it one step further and tell you to invest no matter what the market is doing. There are gains to be made in both up and down markets and you need not be a financial guru to take advantage. Simply having a consistent strategy will pay dividends in the long run.
Investing does not only have to mean sticking your money in mutual funds. It is generally a smart idea to have some of your money in liquid investments like cash or short-term securities. Remember that rainy day fund your parents always told you to stick away?
Lastly, IT IS OKAY TO TAKE MEASURED RISKS, BUT STEER CLEAR OF "TOO GOOD TO BE TRUE" INVESTMENTS. An advisor that calls you up with the "hot stock of the week" may truly have a great investment for you, or he/she may be looking for a quick commission. An advisor that provides you with a long-term plan versus short-term buys and sells is looking out for your future as well as your present financial health.
That being said, it is okay to take risks. That is part of the fun of investing, right? The key here is to risk only that amount you can lose without finding all your belongings in a trash bag on the front lawn, courtesy of your spouse.
There are some sectors of this market that are rich with opportunity right now but, as with all investments, there is some speculation involved. If you have some extra money, talk with your advisor about your options.
You may be thinking to yourself, "I have heard all of this before. Tell me something I don't know.", and I hope that is the case. All of us as investors should have these fundamental values drilled into our heads from an early age, yet we see countless clients who come to our firms without a fundamental plan for their investments. An annual visit with your advisor is a great way to revisit your plan and give you the peace of mind you need during this recession.