Wednesday, May 26, 2010

Stimulus, response.

The current market volatility has me thinking of one of my favorite Far Side cartoons that features an amoeba yelling at her husband for never "thinking", only "responding".

It's human nature to want to "respond" (e.g. sell your stocks) when you encounter a "stimulus" (e.g. your stocks just declined in value). Unfortunately, the stimulus-response method of investing is one of the surest ways to lose money over time!

That's not to say you shouldn't make changes to your investments. It's possible you could have too much of your portfolio in stocks and need to reduce your exposure to the day-to-day risk of losing money known as "market risk".

Or it could be that you're facing a large amount of "inflation risk" because you responded to the 2008 market crash by moving your money to CDs, treasuries, and other "safe" vehicles that might not keep up with inflation over time.

(On a side note, I think the idea of investors having to choose between "returns" and "safety" is somewhat of a false dilemma used by salespeople to push financial products. To avoid this and other conflicts of interest, make sure your advisor is held to a fiduciary standard.)

If you've read previous blog posts or newsletters - or have seen a couple of the weekly "Smart Money Segments" I do for the local NBC station - you've probably heard me mention the importance of following an investment strategy when analyzing your portfolio for possible changes.

As an investor, you owe it to yourself to have a clearly defined investment strategy based on your risk tolerance, time horizon, and goals. That's the only way to make sure that any "stimulus" you encounter in the markets will be followed by a "response" based on logic and not emotion.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit