Most people agree that 2011 was a tough year for investors. Wild market swings, unpredictable economies and a gridlocked Congress all played havoc with investors’ nerves. In uncertain times like these, the temptation is to move your money from one investment to another, trying to limit your losses. That strategy may make an investor feel better, more in control, but won’t necessarily improve returns.
Believe it or not, investment experts who have analyzed last year’s market have determined that someone who invested half her money in the stock market and half in bonds (and left it there for the entire year) would have enjoyed a nearly three percent return on those investments. Granted, three percent isn’t much, but given the market’s volatility and all of the economic uncertainty we faced last year, three percent isn’t bad. And the reality is certainly better than the perception. Most people believe that investments lost a significant amount of money last year – as much as 10 or 20 percent of their value.
According to those same analysts, the percentage of profit decreases incrementally as the amount of money invested in stocks increases. Someone who had 80 percent of her money invested in stocks and only 20 percent in bonds had a net loss of about half a percent. Still, not nearly as bad as the dire predictions we endured and lost sleep over last year.
When it comes to investment strategies, most advisers agree that simple is best. Take your time choosing a handful of investments, diversify your portfolio and then leave it alone. It’s easy to panic when the market has a bad day or politicians are predicting a downgrade of the U.S. Treasury bond rating. But investments are meant to be long-term, so the day-to-day snapshots can paint an inaccurate picture of your portfolio’s performance.
In addition, many advisers also agree that the worst time to move your money is after you’ve experienced a loss. The preferred choice is to leave your money where it is until the investment regains its value. By switching up investments every time one of them losses money, you run the risk of simply losing more and more money until there’s none left. By trying to be strategic and minimize your losses, you could actually decimate your investment portfolio.
The counter-argument to this is, of course, that when money is pulled and then reinvested at the right times, not only can you limit your losses, but you can dramatically improve your investment returns. In theory, this is true. You could look back at 2011 and devise a scenario in which your return on investment is significantly higher. However, that scenario’s success is predicated on moving your money in and out of exactly the right investments at exactly the right time, which seems easy enough in retrospect, but is much harder to do in real time.
As we move into 2012, now is a good time to sit down with your investment adviser and review your portfolio. Talk through 2011, the good and the bad, and set a simple investment strategy based on your retirement and other financial goals. Once you have a strategy, stick with it unless unforeseen circumstances require you to make a change. You may see your portfolio’s value dip in the short-term, but remember that over time most investments regain and increase in value.
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