You Cant Control Everything!

As a society, we are control freaks. We all wish we had a crystal ball telling us what the future will bring so we can plan accordingly. Unfortunately, this is unrealistic.

Over the last few months I have been flooded with phone calls and emails from clients asking me what to do in this turbulent market. Many had stopped contributing to their retirement and investment accounts and were planning to cash out their investments completely. After talking them off the window ledge, I reminded them of a few key rules to investing:

1. Know your risk tolerance: When allocating a 401k or retirement account, it has been my experience that most individuals choose their investments based on the prior year's return. They look a the past performance and find the two funds that have performed the best. These are the funds they choose. (I am sure this is not you!) What they fail to realize is that more often than not, the funds with the highest one year return is the fund with the highest risk. While there is nothing wrong with risky investments, you need to be honest with yourself about how much risk you are willing to accept. Can you reasonably handle 50% fluctuations in any one year? Do you have enough time to earn back losses in your portfolio if they occur?

2. Diversify, Diversify, Diversify*: This is something we have all heard before. By diversifying your investment, rather than "having all your eggs in one basket", your investment can grow more safely. The key is knowing how to diversify your investment. One rule, which will give you a good idea of where you should be, is the Rule of 100. This rule states that if you take 100 minus your age, you will get the percentage of your portfolio that should be invested in growth with risk while the value representing your age should be invested in growth with safety. As an example, if you are 40 years old, you should have 60% of your portfolio in equities and other risky investments, and 40% of your portfolio in safe investments such as high grade bonds and money markets. When you are young, and have time on your side, you can afford to have your portfolio fluctuate. As you approach retirement, and your time horizon shortens, you will have increasingly less time to earn back any losses you have incurred. It is for this reason that the rule of 100 makes sense!

3. Buy Low and Sell High: This is such a simple concept yet, most people do the complete opposite. Why? Because they let their emotions get in the way. With the market at low levels, we should be increasing our contributions to our retirement and investment accounts. So why are more and more people stopping their contributions and moving their assets to cash? Fear. When will these individuals get back in the market? Likely, after it has rebounded and they feel more comfortable about investing. This is a perfect example of buying high and selling low. Don't let your emotions get in the way of smart investing.

By managing the things you can control, such as your investment choices and investment timing, and not worrying about the things you cant, such as the returns in the market, you will regain a sense of control which, after-all is something we all want!


*Diversification may help reduce, but cannot eliminate, risk of investment losses. Historical performance relative to risk and return points to, but does not guarantee, the same relationship for future performance. There is no assurance that by assuming more risk, you are guaranteed to achieve better results.

This is not a recommendation to buy or sell securities, or of any particular asset allocation strategy. These investment guidelines are not intended to represent investment advice that is appropriate for all investors. Each investor's portfolio must be constructed based on the individual's financial resources, investment goals, risk tolerance, investing time horizon, tax situation and other relevant factors. Please discuss with your financial advisor before implementing an investment plan.