Published February 28, 2013
In my opinion, a successful investment plan shouldn't be considered successful just when the stock market rises. A successful investment plan can, and should, have the potential to make money even when there is volatility in the market. After all, there are many examples of low-risk investments making consistent returns when the reward for risk has abated.
Sometimes, the reward for investing conservatively is greater than the reward for risk.
Let me illustrate with a personal story. A few years ago, I owned a new Porsche 911. It was everything the advertisements had made it out to be: fast, powerful and exhilarating. One of its best traits is that it provided instantaneous feedback in the way it responded to the throttle or in tight turns. Very hedonistic, and what every narcissist desires. What a thrill to drive... except on icy or snowy roads. When conditions deteriorated on the roads, the car became a sled, and it would not provide the least bit of pleasure or success in getting me to my destination.
Did that mean it was a bad car and not worthy to own? Absolutely not! It just meant I had to be aware of the changing weather and road conditions when I wanted to drive it, and that was only a few months out of the year. (Actually, in Denver, it’s really only a few days out of the year, but that’s a closely held secret by those in Denver, so don't tell anyone.)
During snowy days, I drove another car built more suitably for inclement weather. The rest of the time, it was a true pleasure to own and drive, but I had to measure that by how and when I drove it. This is an example of greater reward for safety than for risk. The same principle exists in stock investing. You may want to back up your portfolio with less risky investments when there is too much risk in the market. “When is there too much risk in the market,” you ask? Well, if I knew that, I would be ruling the world because I would have an incredible crystal ball. So the answer is...
We, as investors, are typically putting the cart in front of the horse when it comes to investing. We are constantly asking, "What is the right investment that will help me make as much as possible?" when, in reality, we ought to be asking, "How much do I need to earn to get where I want to be in the future?" In my experience, the answers to those two questions are typically a long distance apart. You see, if you need 9% rate of return per year to achieve your financial goals, and you have a 15-year time period to get there, then you may not need to put a great deal of risk in your portfolio with stocks, because a nice mixture of other investments may help you reach the returns you are seeking.
“Okay,” you say, “but what if I am behind in my goals and need to play catch up? What if I need a 12% rate of return during that same 15-year period? Do I have to increase my stock holdings in my portfolio?” Not necessarily. You can always lower your financial needs, or push your target date out further. Any of these choices are within your control, and may keep your risk lower, thus potentially lowering your downside exposure if the stock market corrects. And, since it takes a higher rate of return to gain back what you lost (for example: if you lost 30% you will have to gain 53.8% to get back to even), you won't be chasing returns and playing catch-up every five years.
I understand the concept of lowering your goals, or putting them out further in the future smacks of subversive thinking for those of us that are used to getting what we want, when we want it. But, maybe it is just this kind of thinking we need more of... more patience, more discipline, more moderation, and less vanity.
Chris Ravsten is an LPL Investment Advisor Representative.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
The opinions voiced in this material are for general information only, and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Stock investing involves risk including possible loss of principal.