Knee-jerk reactions to troubling headlines may cause investors to fall into the common pit of selling low after buying high. Lately, we have had a multitude of these headlines from civil wars, earthquakes, tsunamis, tornados, to nuclear disasters. Whether or not we have personally been affected by a natural disaster, we can all feel touched by the spike in oil prices and its far-reaching effect on our wallets.
As I have warned before, knee-jerk reactions in most aspects of life are rarely productive. It is time again to realize the ‘glass is half full’ and remember there are always potential investment opportunities in the face of adversity.
Part of the solution requires each investor have a comfort zone. This would be funds which are not at significant risk, and thus available for use should the markets go through a bear decline similar to 2008 and early 2009. Those investors who stayed in the market or shifted money around during this past recession were rewarded handsomely provided they stayed through the end of 2009. But, for investors who felt they could not afford to lose value, generally they are the ones who lose the most.
The panic sale of investments caused by headlines or market declines generally causes the investor to sell at a low point in value. Then, before they return to the market, they want confirmation the market will no longer go down, so they wait for proof. In this case, proof generally comes from an increasing market value and thus the nervous investor misses much of the recovery in value.
Dividing the investment portfolio into two pots may be a simple solution, but it works for many investors. If distributions are occurring from investments or about to begin, setting aside twenty-four to thirty months of income in a different portfolio may be a solution. The primary account should still be the source of the distributions. The smaller account with two years of income should be managed conservatively so it will not be significantly impacted by negative market moves. Thus, when a significant decline occurs in the market, the primary account can be managed first for protection, and then recovery. During this time the distributions once taken from the primary account, can now be pulled from the secondary account.
Yes, this is a little complex and does require time to manange. But it allows the primary account to take advantage of opportunities created by the decline. Who wouldn’t like to purchase Caterpillar for $22 to $30 per share? It is now trading around $107 per share. Now that we can look back, the numbers of opportunities created by the “great recession” were endless. In order to benefit, it just required investors with long-term view points.
For assistance with insurance, estate planning, and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.