Sometimes being an investor feels like driving on a congested freeway. Changing lanes when you’re stuck in a traffic jam never works out – the lane you choose always slows down and the lane you left speeds up after you change. Patience pays off just as it does when you invest. Sometimes investments may look like they’re performing well for a short time but abandon the plan and you’ll find that they mysteriously slow down. Don’t be tempted to abandon what you own to chase a “near term” performer. By not turning back in the tough times you are more likely to reach your destination. The road will smooth out in the longer term.
Lesson One: stick to your plan unless there have been events in your life that require a change. A responsible financial planning process should help investors intentionally select a certain level of risk that best helps them achieve their goals. Switching risk level (changing lanes) because you think you know which way the market will go next is not wise.
Postponing the decision to start an investment plan is like delaying an important trip. If your destination is somewhere 60 miles away and you have to be there in an hour, you need to drive at 60 mph to get there on time. That’s cutting it pretty close. If you postpone your journey by 20 minutes or so, you’ll be forced to drive at a dangerously high speed to get to your destination on time.
Lesson Two: delaying the decision to invest can put your educational funds or retirement plans in jeopardy. Some feel like they need to take more risk because they need to grow their money faster over less time. More risk combined with luck can equal success, but more risk coupled with market downturns can be disastrous. When it comes to investing, you’ve got no time to lose.
Owning just one single type of asset is like having a large picture window in your living room. While it’s great to look at, if it breaks, you will have a problem. It’s likely expensive, difficult and time consuming to replace. It makes much more sense to have a window with many panes – just as it does to have a diversified portfolio. It isn’t as traumatic to break one smaller pane because it’s a lot easier and cheaper to replace than one large one. Lesson Three: It’s more manageable to replace one portion of your holdings than your entire portfolio.
Human nature can draw us toward the risk of putting many of our eggs in one basket. The reward of magnificent returns in a strong stock market can be tantalizing. That’s why it’s important to have an advisor or trusted professional to remind us that replacing a shattered portfolio can be much more devastating than replacing one cracked piece.