Everyone has a pet concern that, from time to time, may shift to a fear. As the election approached this year, many clients would ask me, “What will you do if (insert name of their least favorite political candidate) is elected?” For others, their concerns are less political and more about slow growth, health care reform, looming deflation, or an uncontrollable budget deficit to name just a few. It was as if they had put on blinders and could only see one issue before them, so they were focusing all their worry on it.
All of these concerns are valid and worthy of pause. An important exercise as you evaluate the risks and threats to your investment portfolio is to put your primary concerns in context. Whatever concerns you the most may seem like the only risk at the time.
Here are some questions that may help put your concern in context:
- What happened when these issues occurred in the past? Don’t just think of a specific concern; study the actual results to put your worries into a realistic framework of possible outcomes.
- What other risks exist and what place do they have in your analysis? As investors, we’ve been concerned about both inflation and deflation over the last several years. To solely focus on one at the expense of the other may paint you into a corner. Recognize that many risks can be offsetting and the worst case scenario rarely comes to fruition.
- What positive outcomes could occur if your fears are realized? You may be focused on the dollar and anticipating that its value will decline. This is disappointing if you’re planning a trip to a foreign land, but it may actually act as a tailwind to corporations who sell US goods overseas.
In reality, it is rare for a single issue to hurt or help portfolios indiscriminately. Generally, in very difficult markets, there are a multitude of factors converging to impact investments. One type of investment may be greatly rewarded by a trend that pummels others. Recognize that there are tradeoffs and complexities that ultimately make the investment world turn.
Investing with blinders and only focusing on your biggest fear is a good way to keep you up at night but it also may make you into your own investment enemy. Honestly, I wish it were so easy that you could confidently call your plays with all in or out based upon a single risk factor leading you to a single investment solution. Centuries of investing say “not so fast.” Don’t ignore the risks, but do take the blinders off and get a good look around at what is really going on in the world.
Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2011 and 2012, Melissa was honored by Financial Advisor magazine in the inaugural Research All Star List. In addition to her frequent contributions to Money Centered blogs, she writes frequent investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.
Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.