Many Investors Think They Can Avoid Risk

Some investors think they can avoid investment risk while seeking financial independence.

People appreciate the stock market’s long-term average annual return of more than 10%. Even bonds have earned a long-term average of more than 5%. The problem is most people do not have the stomach to “ride the waves” along the way from day today or even year to year.

The minute a person invests money, they subject themselves to risk: the risk of loss, the risk of inflation, and the risk of volatility.

How do people try to avoid risk?

• They seek safe havens. Unfortunately, safe havens do not exist. Even guaranteed investments are only as sound as the company making the guarantee.
• They try to time the market. The problem is that no one has figured out how to predictably and repeatedly time the market successfully.
• They concentrate in something they are familiar with. If you are wrong, you subject yourself to serious loss.
• People react irrationally and emotionally to investment news. Humans are hard-wired to make poor investment decisions. We tend to buy on good news (greed) and sell on bad news (fear).  The result: people buy high and sell low—the exact opposite of successful investing.

Is there a solution?

1. Recognize that it is not newsworthy when markets are heading either up or down. Both of these events are normal.
2. Recognize that we all have emotions. To pretend you don’t is asking for trouble.
3. Don’t seek safe havens.
4. Don’t try to time the markets.
5. Don’t try to do it all yourself.

Do doctors practice medicine on themselves? Of course not. Neither should you.

Remember the saying: The attorney who represents himself has a fool for a client.

In like manner, the person who thinks they can invest their own money without any help may be disappointed. Get professional advice from a fiduciary that puts your interest first.

For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.