3 Common Things Investors Overlook When Life Gets Busy

It’s easy for investors to overlook some basic concepts, especially when life gets busy.  By taking just a few short minutes a few times per year, an investor can feel more comfortable about how they have prepared for the future.

1. Time Horizon for Investments – In terms of time horizon, there are many factors to consider. The concept of buy and hold for an indefinite amount of time seems to be very different today than it was 20 years ago. There was recently a study conducted by the growth strategy consulting firm Infosight that has shown that a company’s lifespan is getting smaller and smaller so the ability to buy and hold profitably for indefinite amounts of time is getting less and less.  Many investors, especially those with 401k’s, will choose to leave them with the previous employer when they change jobs because their only outlook is buy and hold for the long-term. A Bureau of Labor and Statistics study showed that younger baby boomers were willing to change jobs over 11 times by age 48*; so, if people are that willing to change jobs and careers, why are they not willing to change their investment time spans more frequently? We are certainly not suggesting that people should day trade their retirement portfolio; rather we are simply suggesting that it might make sense to pay more attention and not only have long-term investments in the portfolio but also shorter-term positions to capitalize on market movements.

2. Asset Class Selections – Let’s tackle asset class first, which is a tool commonly considered for diversification. People often use mutual funds to diversify, but that only minimizes risk of an individual stock showing weakness. The overall weakness in the market or in an economy, in general, will still be a danger to the portfolio.  This is called systemic risk. When one is simply invested in either bond funds or mutual funds with no other investment alternatives, he/she is truly tied to the performance of the stock market in general. For many investors, it might make sense to diversify using precious metals, commodities, and real estate. ETF’s (exchange traded funds) like GLD and SLV can allow an investor to participate in the precious metal arena without the difficulties of futures trading or handling physical precious metals. The challenge is that most investors would never even consider this as a long-term investment solution if they even know they exist at all.  Another opportunity would be utilizing REIT’s (Real Estate Investment Trusts) or ETF’s of REITS as a way to participate in the real estate market without having to own physical property. These products are as liquid as a stock but move with the value of real estate.  At IIE Financial we believe in using ETF’s as a key tool for diversification.

3. Line in the Sand for Protection – What does it mean to “draw a line in the sand”? Simply put, it means knowing how much you are willing to lose in an investment or in your portfolio before bailing out.  Too often investors have the belief that “it will come back,” and that is not always the case.  Let’s first look at individual equities as an example.  In the individual equities markets, there are hundreds, if not thousands, of viable stocks for someone to use as an investment opportunity.  No matter the company, they all go through a similar pattern- startup, growth, maturity, stabilization, and ultimately decline. Some companies take a few short years to go through this cycle, and some of them take decades. Ultimately, they have the same outcome.  Certainly, there are companies like Disney and Amazon that always seem to go up, but for every Disney and Amazon, there are plenty of Alcoa, U.S. Steel, Bank of America, and Citigroup.  There are large, seemingly strong companies that have been unable to see prices anywhere near previous highs.   I am certainly not saying that investing in these stocks is always bad; rather, we need to know when it is time to get out of an investment to manage our own personal risk. 

There is a lot of negativity around the use of stop losses, but that is typically due to their misuse by investors.  A stop loss will never guarantee profits, but it will often serve to prevent catastrophic losses.  One essential element of stop losses, however, is to move them and to create a new “line in the sand” as prices start rising.  By drawing that line, investors stand to profit from rising stocks but will have some protection in place of a correction.  Due to the nature of stocks being only one company, there is inherently more risk.  Something like the BP Deep Water Horizon accident or a battery fire for Tesla can cause great swings in the stock; so, an investor can reduce that risk by investing in the whole market using ETF’s or often the less preferable method of mutual funds.  By using a diversified portfolio there is inherently less risk than in owning the individual stock but also less reward. 

The real question is where to draw this line in the sand and when to move the line.  To understand this, one must understand the mechanics of the markets.  Markets move due to an imbalance between buyers and sellers- a lack of sellers and an abundance of buyers at a particular price point creates a good floor to draw that line.  This “line in the sand” is a distance far enough from price that it will not “wiggle” out longer-term investors but is also close enough that longer-term investors will not suffer catastrophic losses if the market moves against them. By continuing to move price as the market goes up, investors can lock in profits and control catastrophic losses