An Investor’s BFFS: Diversification, Patience and Consistency
Fall is here. The air is crisp, the leaves are raked (until next week) and the bulbs are planted…flowering bulbs of varying size and color. I have arranged them so I have continuous color from early spring to the late fall. The bulbs will shine bright if the soil conditions are right and the weather cooperates. If I am not careful, the squirrels will dig them up and have a winter feast. And later at their peak, I have to safeguard the blooms from the deer that come looking for a late night snack.
Gardening is time consuming and not a hobby for those who like to see their results straight away. It takes diversity, patience, and consistency …. These are three friends that I call on when investing as well. And regardless of how the markets perform, they should be a part of your investment philosophy.
Diversification or “not putting all your eggs in one basket” has real value when it comes to both gardening and investing. A diverse selection of flowering bulbs and plants increases your chances of having a colorful garden in spring, summer and fall. In the financial world, these seasons represent different market cycles. In a bear market, certain asset classes may perform better than others. Ditto for a bull market. If your assets are mostly held in one kind of investment (say, mostly in mutual funds, or mostly in CDs or money market accounts), you could be hit hard by stock market losses, or alternately lose out on potential gains that other kinds of investments may be experiencing. So there is an opportunity cost as well as risk.
This is why asset allocation strategies are used in portfolio management. A financial advisor can ask you about your goals and tolerance for risk and assign percentages of your assets to different classes of investments. This diversification is designed to suit your preferred investment style and your objectives.
Patience in indeed a virtue in investing as well. Impatient investors obsess on the day-to-day doings of the stock market. Have you ever heard of “stock picking” or “market timing”? How about “day trading”? These are all attempts to exploit shortterm fluctuations in value. These investing methods might seem fun and exciting if you like to micromanage, but they will add stress and anxiety to your life, and they are a poor alternative to a long-range investment strategy built around your life goals.
There’s no denying it-the financial marketplace can be volatile. Still, it’s important to remember the longer you stay with a diversified portfolio of investments, the more likely you are to reduce your risk and improve your opportunities for gain. Though past performance doesn’t guarantee future results, the long-term direction of the stock market has historically been up. Take your time horizon into ac- count when establishing your investment game plan. For assets you’ll use soon, you may not have the time to wait out the market and should consider investments designed to protect your principal. Conversely, think longterm for goals that are many years away.
And what about consistency? Most people invest a little at a time, within their budget, and with regularity. They invest $50 or $100 or more per month in their 401(k) and similar investments through payroll deduction or automatic withdrawal. In essence, they are investing on “autopilot” to help themselves build wealth for retirement and for long-range goals. Investing regularly (and earlier in life) helps you to take advantage of the power of compounding as well. Compounding is your best friend. The longer you have your money working for you, the more you will gain. It’s the “rolling snowball” effect.
Put simply, compounding pays you earnings on your reinvested earnings. The longer you leave your money at work for you, the more exciting the numbers get. For example, imagine an investment of $10,000 at an annual rate of return of 8 percent. In 20 years, assuming no withdrawals, your $10,000 investment would grow to $4S,S10. In 25 years, it would grow to $S8,485, a 47 percent gain over the 20-year figure. After 30 years, your account would total $100,S27. (Of course, this is a hypothetical example that does not reflect the performance of any specific investment.)
Are diversification, patience and consistency part of your investing approach? Make sure they are.
ioretta Hutchinson CacA, NCC is a feebased cinancial mlanner and licensed Insurance Agent with Harvest droup cinancial Services in ianghorne, mA. She can be reached at loretta@ Harvestdroupcinancial.com or 215860-6056. oegistered representative offering securities and advisory services through Centaurus cinancial Inc., a registered investment advisor. Member cINoA and SImC, Supervisory Branch: 3902 State Street, Suite 101, Santa Barbara, CA 93105, 1-888-5691982. Harvest droup cinancial Services and Centaurus cinancial are not DIfiLLDTHG.