All-or-Nothing is Never the Right Move

March 29, 2011

I have a difficult time forecasting my preference for meals. At times (many times), it’s pizza; other times, it’s something a little healthier. This indecision about what I’ll want tomorrow causes me to not stock up on much, and I rarely shop too far out.

 

Just as what you may want for dinner today may not be what you crave tomorrow, so it generally is with our preferences for investments.  

 

The volatility in the markets, combined with the rise in oil and commodity prices, and low-interest rates we all ‘know’ will be rising, have many wondering about products designed to protect us from any of those things.

 

You may recognize one of the two feelings I’ve identified from conversations with clients over the past few market rough patches as reasons to give up on traditional investment strategies such as asset allocation and diversification:

  1. “I need to protect my portfolio from inflation.”

  2. “I’ve had enough of this volatility, I need 100% stability.”

Generally, the thought behind the first idea is to get out of financial markets and buy gold; the idea behind the second is an annuity, Treasury or municipal bond portfolio, or simply to put the money in the bank.

 

Regarding the first, the need for assets to keep up with inflation is a worthy goal. But as seen in gold, home prices, commodities, and more, the limited scope of inflation protection in any asset, and the fact they are all also traded in markets, may not always work in your interest.

 

To the second group of investors who look at the stability of their dollars, I sometimes want to say that the first group has a point!

 

Ignoring the need for participation in capital markets and going all in on a ‘safety’ strategy may feel good today, but it may simply be deciding to delay the pain. Put into perspective, if you receive $25,000 on an annual basis from an annuity, what will you do in 10 years when it costs $35,000 to purchase the same amount of goods and services? Or $80,000 in 30 years? 

 

It often is a desire to avoid investments which have done poorly over recent periods for one that will provide safety, generally in terms of protecting principal, but also increasing with the costs of living.

 

I try to remind investors that two amazing features about our financial system and markets are their resiliency, and that over long periods of time that products tend to perform in a predictable manner. Don’t be too shortsighted with your portfolio to ignore the long-run track record of the markets.

 

Carefully consider any large changes in strategy before implementing, and try to avoid all-or-nothing approaches to your portfolio. Just as a balanced diet includes more than pizza, a diversified portfolio has many benefits over any all-or-nothing investing approach.

 

The preceding blog was originally published by the Financial Planning Association®(FPA®). To view the original blog please visit the FPA Web site

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