Investing Scared: Part 2

by Gary Silverman, CFP®

In this column, we’ve been examining the ups and downs of including stocks in your portfolio. I often mention that I stay in the stock market through thick and thin.

So, with my blessing, and your own study, you may start adding or increasing your holdings of stocks in your investment mix. But please don’t do so if you can’t stand what might happen next. The last crash wasn’t that long ago. You’ve seen how dire the market can look. You’ve seen fear in the eyes of many investors—amateurs and professionals alike. The stock market will punch you in the gut now and then. Toughen up, be ready for it, and make sure you have a good defense in case of this inevitability.

That, or stay out of the fight.

I stay in the market because I can look at any graph of the stock market and see an upward trend. Still, look back at that stock market graph. It is not a straight line up. Quite regularly the stock market goes down 20-25% or more. Heck, we’ve seen it go down 50% twice since we entered this century. While making promises about investment returns is a big no-no to the regulators, I’m sure even they would allow me to tell you the following:

I promise you that if you stick with the stock market it will go down. Maybe not this month, or this year, but it will go down again.

I promise that as a result, your portfolio will lose money—at least for a while.

I promise that you will not like this.

This doesn’t mean you should ignore or enjoy market declines. There are many strategies to lessen the pain. For our clients we used a variety of methods to try and minimize the downside of their portfolios.

The results? None of the techniques kept the portfolios we manage from losing money in 2008. I’m sure many of you used strategies that purported to moderate market losses and still saw your account plunge during the end of 2008 and start of 2009. Yet I’m guessing that if you look at the history of those strategies, you will see that they never promised you’d avoid a market drop every single year.

But, in keeping with the negative tone, please concentrate on the sentence, “None of the techniques kept the portfolios I manage from losing money in 2008.” That means that even when anticipating stock markets going down there is nothing that can be done to completely eliminate your losses if you have a decent sized chunk of your investments in stocks.

Nothing, that is, except to never invest in stocks in the first place.

Is that what I’m recommending? No, of course not (you HAVE been paying attention, haven’t you?). 

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.