Investor Behaviors and Investment Basics

by Laura Hall, CIMA®, AIF®, Senior Portfolio Manager/Director of Client Services, REDW Stanley Financial Advisors

From Capital Conversations (Summer 2017) – View Newsletter

Many investors, including some of REDW Stanley’s clients, are a bit uncomfortable with the present state of the stock market. They feel that valuations are too high, that the extended life of the recovery is undeserved, and that, any day now, the other shoe is going to drop (meaning the market will experience a correction – which, incidentally, is a normal part of an economic cycle). What can we, as your financial partner, do to help improve your comfort level?

We can help by keeping your focus on those things you can control, rather than fixating on those you cannot. Here are 10 investment basics you can count on:

  1. The highs and lows of the market are outside your control, but how you deal with those highs and lows is something over which you do have control. Your behavior does impact your portfolio’s performance. Call your Relationship Manager when you have questions about the market to make sure you are invested according to your risk tolerance to achieve your financial goals and objectives.
  2. Risk, which is the permanent loss of capital, can be controlled by being invested according to your personal risk tolerance and maintaining a long-term view of the market.
  3. Time in the market is a key to increasing your portfolio’s value – not timing the market. Compound interest, as well as the proper asset allocation, are provable ways to grow a portfolio in order to reach your financial goals.
  4. Remember the Oracle of Omaha’s advice, to be “greedy when others are fearful and fearful when others are greedy”. It is a challenge to see a market downturn as a buying opportunity (who invested in the stock market on March 9, 2009?), so commit to continue investing and trying to increase the dollars invested even when the TV, print and radio pundits are suggesting otherwise.
  5. Diversifying your portfolio does not mean your portfolio may not decrease in value. It does protect your portfolio from unnecessary risk and from making a large bet on a tip that you got from a friend on the golf course. You buy insurance to protect your home, even though you may never make a claim against the policy. Diversification is similar in that the benefits are not apparent while the market is going up, but you can see the benefits in a market downturn.
  6. There is a strong relationship between risk and reward. It is tempting not to rebalance your portfolio when the market is going up by selling those assets that have increased in value and buying those assets that have not done as well. I have had clients refer to that process of “selling the winners and buying the losers”. However, not rebalancing on a regular basis subjects your portfolio to more risk than is necessary without the commensurate reward. Think of rebalancing in terms of good fielding wins baseball games and good defense wins football games.
  7. Trying to forecast what the market will do is very similar to forecasting the weather: it can be done, but not with regular success. A favorite saying of mine is: Weather forecasters and professional baseball players are paid a lot of money to bat 250 (no offense to either of those groups). Be aware of the market and the forces that affect the market, but invest your portfolio according to your individual risk tolerance, work with a financial professional in whom you have confidence, and enjoy your life.
  8. Nobel laureate Paul Samuelson said it best: “Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.” A basic premise of investing is to determine your risk tolerance, put your dollars to work in a portfolio invested according to your risk tolerance, and rebalance on a regular basis to maintain the appropriate risk level in your portfolio.
  9. One of the most infamous phrases in investing is “This time is different”. It’s tempting to think that manias and excesses will last forever (think tulips, South Sea Company, Internet stocks, and real estate), but they do not. While in the short term markets may be driven by trends, emotions, politics and irrational exuberance, they will all run their course, while fundamentals such as growth of corporate earnings will prevail.
  10. Use the right benchmark: your personal financial goals. Your goals will make investing meaningful to you and help you focus on what is important to you. Research confirms that goals-based investors are more likely to focus on their goals during stressful times and to continue their investing strategy because their goals are significant and meaningful to them.

Did you know?

  • Now in its 8th year, REDW is hosting its annual Tribal Finance & Leadership Conference right here in our own back yard, at Sandia Resort & Casino, November 7-9, 2017. The Conference will provide those in tribal leadership roles, nationwide, with guidance on top financial, legal, human resources and leadership issues affecting Native American Tribes.
  • Heads up to those of you who are attending weddings this season: According to the American Express Spending and Saving Tracker, the average wedding guest spent $70 for each wedding
    attended last year. Source: CNBC.com.
  • REDW Stanley has a number of musically inclined clients who have displayed their talents for years. One of our clients, now in her early 60’s, began playing the guitar in the fifth grade and became a professional musician in her late teens/early 20’s. She now plays an electric bass guitar and is also a singer with a fondness for jazz and blues. She performs known musical scores
    as well as original music and is starting a band in the Santa Fe area.

Copyright 2017 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.