This article is about how a written game plan can help reduce your investment risk. My name is Laurence and I’m a watchaholic. I admit it, I love watching the stock market. Everyday I visit Google Finance and look at those little red and green graphs. It’s addictive.
Have you experienced both happy and sad feelings when the market rises? (It usually goes down the day I buy). The happiness part needs no explaining, but the sadness part comes from the emotional feeling of a missed opportunity. You know that “I should have bought when the market was at xxxxx points” feeling? I experience that often.
I remember when the US Dow Index dropped below 7,000 in 2009. I was thinking I should buy some stocks. But I had no clue what to buy and thought the market was going lower, so I did absolutely nothing; for years. This is what makes stock market timing impossible; our emotions can be our biggest roadblock no matter which way the market is moving.
How to Reduce Investment Risk
Do you know what makes investment risk shoot through the roof? It’s not a high risk stock or the latest biotech fund. You might be surprised to learn it’s you! We can be our own worst enemy. Buying at the wrong time, selling at the wrong time and even doing nothing increases risk. Reducing investment risk is critical long term.
I’ve made some silly investments in the market, blindly chasing the next hot sector looking for above average returns. Did this strategy work? Once or twice but many times it failed. The last time the urge to veer away from my investment strategy overcame me, I wrote down my game-plan and taped it up in my office:
Index investing (or tracker funds) is pretty boring but it works and has done so for decades. So why do we feel the urge to increase investment risk and try new things when we know what works? For me it’s for the thrill of the chase. Just as a gambler chases the next win, so does the investor. Hopefully you can curb this urge and think about the times when you have invested in stocks that have performed poorly. It’s a painful feeling.
When some of your investments are performing poorly, there will be the temptation to sell them and replace with investments which are performing well. That temptation will increase your investment risk considerably. The most important piece of investment advice I ever heard is the only way you can lose money is if you sell. Buy the right investments (index funds) and hold forever. This is how you decrease you investment risk.
Thankfully I’ve been able to spice up some of the boredom of index investing with peer 2 peer lending which for me has been much more exciting than single stock picking.
I strongly believe you’d be better off not checking your portfolio values and leaving your retirement statements unopened , especially when the market is in a downturn. By doing so you won’t be tempted to make any changes which will negatively affect you. But just in case you’re a watchaholic like me, remember to write down your investment game-plan, put it somewhere you can read it daily and most importantly, stick to it. It will serve you well in the long run.