Wednesday, November 9, 2011

The Stock Market Thriller

“Make sure your seatbelt is securely fastened and keep your hands and feet inside the vehicle at all times.” 

This is what you hear as you get on an amusement park roller coaster. Maybe your stock broker or financial advisor should also say this when you begin to invest in the stock market. In the spirit of full disclosure, should we formally address the stock market by its thrill ride name?

There is Disney’s The Twilight Zone Tower of Terror, Kings Island’s The Beast, Six Flags Great Adventure’s Kingda Ka, the Stratosphere Hotel and Casino in Las Vegas has Insanity, and the king of amusement park roller-coasters, Cedar Point in Sandusky, Ohio has Disaster Transport, Iron Dragon, Maverick, Mean Streak, Millennium Force, Raptor, Top Thrill Dragster and Wicked Twister. Any one of these names fit the gyrations, the ups and downs of the stock market.

Even with your seat belt securely fastened, it is a good time to reassess your risk tolerance and which investment options best fit your personal goals and ‘ride’ tolerance. Monday’s Wall Street Journal (11.7.11) has an entire section titled Investing In Funds which examines mutual fund investing and different opportunities. How to Rest Easy in a Crazy Market provides seven tips to help you “enjoy” the ride and make sure your portfolio stays on the tracks. Here are the seven points:

1. Get real about your tolerance for pain. We have all heard “the higher the risk, the higher the potential return” but we don’t hear “the higher the potential for loss.” Risk involves the ups and downs, and if we are in risky investments, we better be prepared for the downs and possible total loss of our investments.

2. Favor funds that cast a wider net. Spread your risk out by being diversified in your holdings or in funds that are more diversified. In other words, don’t put all your eggs in one basket, but diversify in different baskets composed of different eggs.

3. Hire a pilot who charts a smoother ride. All of the funds are going to have their ups and downs, but look at funds managers who reduce volatility to smooth out the ups and downs. Unless you like the ups and downs, make sure you have on your shoulder belts and HANS devise.

4. Don’t try to wager on where stocks are headed. Face it, you can’t time the market for peaks and valleys. Be a continuous investor, putting money in the market monthly where you don’t have to worry about the highs and lows and trying to time the market. Also rebalance your portfolio periodically to make sure you stay on track.

5. Fine-tune your cash stash to your family’s needs. With any investment, you need to think about when you will need to convert it to cash. Would you need to cash in your investments if you were to lose a job, buy a car, down payment for a house or pay for college? Everyone’s circumstances are different, but money that you will need with a short time horizon should not be in volatile investments.

6. Don’t assume that a stock-free portfolio is risk-free. Bonds, precious metals, commodities, houses, pork bellies as investments all carry risk. Know the risk of the investment and your investment objective before investing, not after the investment has declined in value and it is too late.

7. Don’t be ashamed to seek help. Investments are complicated and if you need help, there are personal finance classes offered at your local colleges and universities as well as financial advisers and planners that can help you determine and reach your financial goals. This is not to say that you don’t need to be concerned with your investments. No one is going to be more concerned about your investments and wellbeing than you. Be financially knowledgeable, financially literate, and monitor your progress towards achieving your goal.

You have the decision whether you are on one of the top 10 thrill masters or want to go for an easy ride in the park. Be knowledgeable, make wise decisions, go for your goals and enjoy the ride.

What is your favorite roller coaster name to best describe the stock market? We invite you to post your response in the comments.