Fear or Fad
By David K. Little, CFP®, CFA and Amber M . Shrosbree
The world moves fast, and as an investor your money naturally moves with it. Some days this movement makes you bold, and other days it makes you want to run for the hills. A looming pressure exists to stay ahead of the curve in order to secure your future. The news is a huge driver of heightened urgency and rash decision making. You see constant reports rolling out on this hot new company that promises your ability to retire tomorrow. You worry that if you find yourself too slow to act you will end up missing out on securing that nest egg you want to leave for your kids. On the flip side, you see a flood of doomsday stories making you wonder why you are still invested in anything at all, and decide you need to sell everything. Right now.
When it comes to making investment decisions, two questions must be asked.
1. Is this a fad?
2. Am I acting out of fear?
The Fad
It is 2006. There is this new booming stock for a company making products out of recycled tires. This is such a forward – thinking concept. It is sure to produce returns. You believe this to be true because that is what everyone is saying. You are so confident you have picked a winner that you call up your financial planner and urgently request that $50,000 of your portfolio be allocated to this company. “Hurry!” You say. “Before I miss out!”. Your advisor pushes back with the thought of your long-term success in mind. But you have your long-term success in mind as well, and you are sure that you are securing it with this investment. You and your advisor find a compromise and you invest $15,000 to start. Two years later you end up selling that stock for $11 and taking your loss, thankful that $15,000 is all you ended up investing in this stock. Everyone is going to say they are the next big thing. Before buying into that claim, ask yourself: “Is this a fad?”.
The Fear
Fast forward to early 2009. A president you did not vote for has taken office. You are convinced he is a socialist and that scares the living daylights out of you. Surely this country cannot weather this storm. You think about your portfolio and realize you need to save yourself. You sell almost $1.5 million dollars of investments and put them in a much safer place - fixed annuities. Three years later you are discussing your prudent investment decision with your friend who had the same amount of money invested in similar securities at the start of 2009, but instead, stuck with them. Your investments have grown by 2% per year since switching to fixed annuities. Your friend’s portfolio, however, has grown by 65% since 2009 when the new president took office. You crunch the numbers and make the shocking discovery that you have missed out on $839,000 in gains by “saving yourself”. You have learned the hard way that before making money decisions you need to ask yourself “Am I acting out of fear?”.
How we can help
We realize that this year has brought a whole new meaning to fads and fear. A certified financial planner can set your mind at ease because you can know they are asking those essential questions for you, among countless others that you may not even know to ask. If you are feeling unsure about your money in these far from normal times, you can call us at (714)738-0220 or visit our website at www.eclecticassociates.com to schedule a complimentary phone call or meeting with one of our fee – only financial advisors.