Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Thursday, November 11, 2010

More Words of Wisdom from “Anonymous”

Our last “Words of Wisdom” blog was attributed to that unknown person “anonymous”. Today’s quote from anonymous is “a rising tide raises all ships”. We suspect that most investors are feeling a bit better now about their investments with the market’s recent rally. At the time of this writing, the Dow Jones Industrial Average is up 11.89% for the year.

Some are probably patting themselves on the back for their good judgment and investing prowess. “Anonymous” says, however, that we should not get too overconfident about our investment skills, for everyone’s portfolio has risen along with the market. Nevertheless, you can at least take credit for being “in the market”. If you remained in the market throughout the last two-year crisis, you are to be commended.

We often talk about the “typical investor” who buys high and sells low. They follow the crowd, buying the latest hot assets and then panic and sell when the market crashes. They need to do just the opposite. Even if you stayed in the market, you may have some of the bad characteristics of our typical investor.

So what should you do now? You might want to take a look at your portfolio and trim your winners back to your target allocations, if you have target allocations. If you don’t have target allocations for the various asset classes in your portfolio, you might want to spend some time establishing targets. If you’re not sure how to do this, we recommend you seek professional help.

If you stayed in the market but are not broadly diversified, you should consider diversifying your portfolio as soon as possible. Again, we suggest you seek professional help if you don’t know how to do this.

If you pulled everything out of the market and are still sitting on the sidelines, we really recommend that you seek professional help. You need to establish a broadly diversified portfolio tuned to your individual risk tolerance so that you can avoid panicking the next time there is a serious market crash.

If we assume your risk tolerance is low, you may need to dollar-cost average back into the market in order to sleep at night. If you are a long-term investor, however, and have confidence that over the long run the market will rise, putting your entire portfolio back into the market now is the best approach. (This assumes you have an adequate emergency fund and funds needed for short-term goals are invested more conservatively.)

Whatever your situation, don’t get overconfident just because the market has risen nicely in the last few months.


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