In last week's Free Lunch Podcast "Spidey Sense & Risky Business" we reviewed risk and the difference in risk perception, risk tolerance and, risk capacity. We also posted about the Risk of the Cheese Pizza menu and the benefits of having a well-diversified investment portfolio. But - what happens when you are not exposed to the whole market, instead you are exposed either to a concentrated portion of the market or a concentrated stock position?
A lot of our conversations these days are focused around what happened in March and, the fact that markets went down thirty five percent in the fastest bear market in stock market history, which was shortly followed by the fastest bull market in stock market history. When swings like this happen, we have to remember that stocks are constantly playing mind games with us; as in, people always expect them to go up. But, no one can really predict what the future returns of the market will be. No one knows what the future holds for economic growth, especially right now. It is hard to predict with certainty in this uncertain environment what is going to happen in the next thirty days to three hundred sixty five days, or more. Predicting future risk is fairly easy- markets will continue to fluctuate and experience losses on a pretty regular basis. If you are an investor in individual stocks, you will likely spend a lot of time second guessing yourself because you see the portfolio has fallen at certain periods, like in March, and it drives people to make rash decisions. In a sense, risk is easier to predict than returns. Market losses are the one constant that do not change over time. They are just cyclical.
The important thing is to have a plan in place and to stick to it. When you have a plan, when you know the goals you are trying to achieve require a certain rate of return, then you can likely afford to fall behind. When the market is doing well, you will have the opportunity to realize the returns that you need to achieve your goals. When you get down to it, just being in the market, the whole market, can take some of the unpredictability out of your investments. It is also a good way to earn a reasonable return over a long period of time.
Happy investing!
-The CM Group
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