The stock market has been declining for over two years and odds are your
investment portfolio has been doing the same. If you are like most people, a
substantial portion of your net worth has evaporated. The question is, “where do
I go from here?”
First of all, let’s put this decline into perspective. Since
500 has declined over 30%. While drops of this level are not unprecedented, we
have not experienced a slide of this magnitude since 1973-1974. The actual
decline of many investors is far greater than the 30%. It is not uncommon to see
losses of 50-75% of one’s portfolio, particularly if there is a high concentration of
technology or other high growth stocks. So, just “where do you go from here?”
In order to address this question, it is important to understand where you have
been and if mistakes have been made. Just because your portfolio has declined
does not mean you have done things wrong. Long term investing involves both
good times and bad times. But if your investments are taking wild swings that
make you uncomfortable, you must alter your investment strategy to fix that
problem.
Most people who have received investment advice in one form or another have
been told the importance of diversification. But are you really diversified? If you
have lost half of your investment
worth, you did not have a diversified portfolio. I
would go so far as to say if you lost more than 15%, you were not diversified.
Many people make the mistake of thinking that the number of holdings
constitutes diversity. However, owning five different mutual funds or thirty
different stocks doesn’t mean you are effectively diversified.
In order to have a balanced and well-rounded portfolio, you should own mutual
funds that cover all of the following categories: large stocks, small stocks, value
stocks, international stocks, bonds, and even real estate. The amount you
should have in each of these categories depends on your investment goals and
your tolerance for risk. These are things that a Certified Financial PlannerTM or
other qualified investment professional can help you develop. When should you
do this? Immediately. Don’t wait for those stocks that have dropped 70% in
value to get back to where they were two years ago. The odds of that are very
unlikely, and here is why: Suppose you owned XYZ stock, and at its high it was
worth $100, but now is at $50 (a 50% decline) per share. In order to get back to
$100, the stock now needs to double, or increase 100%, just to get back to its
original level. A much more sensible and long-term approach is to alter your
approach now, and begin creating a diversified strategy to help achieve your
long-term goals.
# # # # #