If the year 2022 has shown us anything, it is that investing in the stock and bond markets is subject to risk. If the markets continue their current trajectory through December 31, the year 2022 will be the first year since 1969 that both the stock market and the bond market ended a calendar year with negative returns.
I mention this to draw attention to a few important reminders that need consideration when it comes to investing money.
- Time Horizon – When considering an investment strategy, it is important to understand when you will need the money. The more years you have until you need the money, the more equity risk you can absorb. However, the closer you are to needing the money, the lower your exposure to market risk should be.
- Risk Tolerance – What is your true tolerance for investment risk. Some people are more tolerant of the “ups and downs” of the market, while that same volatility causes others to feel anxious. When investing money into the markets, it is important to be honest with yourself and your advisor regarding your true tolerance for market volatility.
- Diversification – When managing investments, another important item to pay attention to is how your investment dollars are well diversified. In other words, make sure that you are not “putting all of your eggs into one basket.” The lack of proper diversification in a portfolio could potentially expose the investor to significant risk. As examples of this risk, consider the Enron and WorldCom debacles from years ago, or the more recent example of the collapse of the cryptocurrency exchange known as FTX. The road to investment catastrophe is littered with defeated investors that had an overconfidence in a particular company or industry. As a result of their overconfidence, they had too much of their money invested in their preferred company or industry. Eventually, the previously unthinkable happens and severe losses result. While diversification is not a guarantee against losses, a properly diversified portfolio can help reduce portfolio volatility, potentially resulting in a “smoother ride.”
The Master’s team is grateful to have the opportunity to play a role in helping our clients construct and implement investment strategies based on each client’s specific situation. As you consider your own investing experience, what lessons have you learned? We would love to hear from you!
