The news is frightful. The economy is in
the doldrums. Europe is crumbling. The markets are up 4oo one day and down 400
the next. Thoughts of 2008, when venerable institutions, Lehman Brothers and
Bear Sterns, — remember them? — fell like dominoes play in the minds of
investors. There are never any certainties in life or in the markets for that
matter, but seriously, what is an investor to do?
Three words….Defense! Defense! Defense!
Defense is not only important for success
on the court or ball field but also on the playing field of investing as well.
How many investors wish they could do 2008 all over again? Of course, 2008
marked the second bear market in 8 years, and many investors suffered losses to
their portfolios exceeding 40%.
Why is defense so important when
investing? The math is simple, and this is all you need to know. Say your
portfolio incurs a 10% loss. To make back your losses, you need to gain 11%.
Very doable and very reasonable. Now your portfolio incurs a 20% loss. To get
your portfolio back to even, you need to score a 25% gain. However, there is
one problem. Gains like that don’t come along too often. Since 1973, the
SP500 has gained greater than 25% (in any one calendar year) only 3 times. Get
into a 40% loss like most investors did in 2008, and you will need a 66% gain
just to break even!! Needless to say if your portfolio suffers extreme losses,
it will be a long time before you are made whole again.
Fortunately, when it comes to investing,
playing defense is relatively easy. Unfortunately for investors, they usually
don’t think of defense until their portfolios have suffered those crushing
losses. So what can you do to play better investing defense?
Here are 4 steps you can implement right
away. The first and probably best thing you can do for your financial health is
to have an investing plan. Our
lives are busy and complicated enough, so having a professional financial
advisor craft and execute a plan for you is essential. It is worth the money.
Successful endeavors usually require discipline and skill, and investing is no
different. The second thing you can do is to be diversified in your investments. Don’t put all
your eggs in one basket. The third step is to be data centric in your approach. Avoid the water
cooler tips and do your homework from the many credible resources on the
internet. Fourth, always question the prevailing dogma and never believe that “this time is different” because it
usually isn’t.
For many investors, playing defense is
akin to sacrificing gains. Academic research and history tells us that you can
construct winning strategies that play both offense and defense. You don’t have
to sacrifice rewards to control your risk. From this vantage point, successful
investing starts with avoiding a hole that you cannot get out of.
So put your game face on. Knuckle down.
And play some investing Defense!
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