Harnessing Risk in Any Market

If you're an outdoor enthusiast, at some point or another you've probably contemplated what you might do should you encounter a bear or other wild animal. Wildlife experts typically recommend these tips: Stay calm and don't run. Investors might also do well to heed that advice when traversing the stock market.

Plan ahead -- Rather than fret about which way the market is headed this week or even this month, do what 87% of millionaires do to reduce worries -- be proactive and develop a plan.1 A sound financial plan can keep you focused on your long-term financial objectives and keep you from getting caught up in the doldrums of a short-term market downturn or the hype of the latest hot sector.

Hold on -- A buy-and-hold investing strategy can also help keep you from being distracted by short-term market performance. It can also potentially help reduce the risk of loss over time.

Maintain realistic expectations -- Consider that since 1926, the average total annual return of the S&P 500 has been 9.9%.2 Maintaining realistic return expectations can make it easier to cope with short-term market downturns.

Make diversification your ally -- Different types of investments lead the market at different times. By holding a well-diversified portfolio of stocks and bonds, for example, you may increase the possibility that those securities that increase in value could offset those that decrease.

Try dollar cost averaging -- Think about adding to your investments on a monthly basis as opposed to purchasing or selling securities based on anticipated market changes (called market timing).3 This disciplined strategy can take the emotion and guesswork out of investing. It might also save you money. By regularly investing in a mutual fund, for example, you buy fewer shares when prices are high and more shares when prices are low. Over the long term, the average cost that you pay for the shares may be less than the average price.

Seek expert advice -- Meet with a qualified financial advisor regularly. In particular, you may want to get into the habit of beginning every year with a comprehensive portfolio review.

 

Source/Disclaimer:
1 Source: The Millionaire Mind, Thomas J. Stanley.
2Source: Standard & Poor's, 2011.

This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Robert J. Pyle, CFP®, CFA, a local member of FPA.

 

Required Attribution
Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.