Investors and Retirees Must Slay the Ghosts of Markets Past

Guarding Your Wealth" is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.

(PRWEB) May 16, 2005 -- There are many investors who are once bitten, twice shy" when it comes to investing, especially those that have had significant losses in the past. Unfortunately, those bad memories are causing many of them to make bad investment decisions today. Over-generalizing past experiences, both good and bad can have dire affects on your hard-earned nest egg.

Many people who traditionally shunned stocks began investing in the stock market during the '90s. They were handsomely rewarded. But those investors (and their advisors) failed to realize the dramatic shift that began occurring in 2000. As a result, many lost much of what they had gained, some selling out with huge losses.

Its understandable that someone is hesitant to invest in an area where theyve lost significant amounts in the past. One of the biggest mistakes investors make, though, is to overreact to investment experiences. You certainly want to learn from the past, but a knee-jerk reaction will create a host of new ones that will greatly impact you long-term.

Stock markets naturally fluctuate, but these 'bitten investors become very nervous with even minor market drops. The truth is that the markets dont move up in a straight line. You cant take your money out of the market every time it posts a small loss and reinvest later after its recovered-youll continue to lose money.

Past experiences cause many investors to entirely shun a category that should play an important role in their portfolio. Many investors today want to avoid equities all together. Others might avoid real estate. You may have lost money in a bond mutual fund and now avoid all mutual funds. But avoiding any category completely is a big mistake. A properly balanced portfolio has been shown to contain less risk than an unbalanced one.

Some REITs provide an excellent, stable source of income but some investors avoid them like the plague because they bear a slight resemblance to failed limited partnerships of the 80s. Theyve allowed losses they suffered on LPs years or decades ago keep them from benefiting from quality REITs today.

Just as bad experiences color our investment vision so do good experiences. This can cause investors to over-invest in a single category. Technology stocks are one example, bonds are another. For the last two decades, bonds have given returns approaching the high single digits, making them the investment of choice for retirees.

Bonds great returns have caused many retirees to over-invest in them. Most have seen the level of interest they receive plummet the last few years and have turned to risky investments to replace that lost income. This puts them in a precarious position moving forward.

Successful investors have learned the secret of not overreacting and over-generalizing. They recognize that their bad experiences could have been the result of issues specific to an investment but didnt affect the rest of the category. Perhaps the mutual fund they were in had bad management or used an ill-timed strategy. But that doesnt make all mutual funds bad.

They also realize that various investments will perform differently depending on the market and economic environment. The same investment can be the worst possible investment in some situations, but the investment of a lifetime in other situations.

For instance, there is a mutual fund called Rydex Tempest that is designed to produce a return twice the opposite performance of the S&P 500. Funds like this are called 'inverse funds because they move up when the index goes down and down when the index goes up.

In 2003, Rydex Tempest dropped 43%! An investment of $100,000 in the beginning of that year would have been worth only $57,000. On the other hand, Tempest was up 37% in 2002-a terrible year for the market.

Is this fund a good or bad investment? Neither. Theres just a right time and a wrong time to be invested in it. When it comes to investments like stocks, bonds, mutual funds, or real estate investment trusts, how and when the investment is used will in large part determine whether it was a good or bad investment.

So dont let the ghosts of markets past cloud your investment decisions today. Dont overreact. Properly managed, each category of investments will play an important role in your portfolio.

Ill personally answer your financial questions. Go to www.guardingyourwealth.com and click on 'Ask Jeff.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Looking for an energetic expert who is passionate about financial and wealth management? Mr. Voudrie is an excellent speaker who will excite and inspire your audience. Mr. Voudrie is available for a limited number of speaking engagements, television appearances and radio talk shows. For booking information, email jeff@guardingyourwealth.com.

Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth Article Archive.

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