What are the lessons investors and advisors have learned from the Great Recession? Investment Partners’ Doug Bambeck shares these four tips.
- There’s Always Risk for Your Money. “Whether you leave your money under your mattress, in a savings account, or invest it, there’s always risk with it,” Bambeck said. One of the great lessons of the Great Recession is that investors learned their true tolerance for risk in investing, but they often don’t consider the risk they face when doing nothing or keeping money “safe,” he noted. “When you put money into a savings account, the interest you earn doesn’t keep up with inflation and the cost of living – meaning that you are losing money over time,” he said. “Historically, a properly allocated account returns 6 to 8 percent, even though the stock market’s recent history hasn’t been as pretty.”
- Don’t Decide Investments with Emotion. “The economy in 2011 is not as bad as it was in 2008. Businesses are doing better and banking is more stable,” Bambeck said. “Those who remained fearful and did not reinvest lost out on an improving market. But it’s human nature to fear the unknown, especially when there is uncertainty about employment and tax law changes. That’s why it’s important to keep your long-term goals in mind and use your investments toward these long term needs. That way you become less worried about the day-to-day swings in the market. People who like to manage their investments day-to-day, buying low and selling high, have to be right twice – buying the stock at its low ebb and selling it at its maximum price. They often feel good for a short time, but that investment may not have been a smart one over the longer term.”
- Diversification is Important. “Since different classifications respond to the market in different ways, diversifying your investments can help lower your risk,” Bambeck said. “For example, the European stocks have a low return right now due to their financial uncertainty, but in the future they might bounce back quickly if they work out their problems. Adding other asset classes such as commodities can also help spread the risk.”
- Have realistic expectations. “As we’ve said, a properly allocated account has historically made gains of about 6 to 8 percent on average,” Bambeck said. “You’re not going to double your money in a year, but over the longer term, you can make significant gains. It’s important to set realistic goals, know how comfortable you are with risk and the amount of time you have to reach your goals.”