With Memorial Day fast approaching…and summer BBQs possibly starting soon… here’s a good one from the Archives of TGIF 2 Minutes….
May 2020:
A popular topic that inevitably comes up over holiday weekends and even at socially distant BBQs is “the latest hot investment” or the brilliant neighbor who made a killing in “Fund A” or “Investment B.” But did you ever notice that rarely does the conversation highlight the losing investments?
Of course, there are those informed investors who bravely recount past losses or fluctuations in a company retirement account. Nearly everyone over the age of 33 has experienced a decline in the value of a 401k or 403b… and the seasoned savers among those may have experienced a rebound over time (please ask me why that happens). But that is the boring stuff.
The hot topic to which I am referring comes from the person who excitedly recounts that he or she made a financial killing by absolutely knowing the perfect market sector or the fund that was purchased at exactly the right time. But the question begs: was this person’s ENTIRE portfolio invested in that ONE market sector or fund? Likely not. In fact, there is a huge part of the story that this person typically leaves out: that the other 50-80% of the portfolio that was NOT invested in this “hot” sector or fund may have gone partly down in value or stayed about the same over the past few weeks or months.
That part of the story is not exciting to tell. That (boring) part of the story better represents reality.
- Portfolios experience volatility – both up and down.
- Portfolios are made up of pieces, at the most basic: stocks, bonds, and cash.
- There are different forms of diversification, including the way an investment or account is taxed.
- There is nearly always a portion of a well-designed portfolio that will be down slightly in value – it could be the bond portion, or a purchase made with “bad timing” that is an otherwise solid long-term investment.
The person who starts talking about Asset Allocation and patient investing over the long-haul is the lonely person at the cocktail party or BBQ. And know that if those are the topics that are on your mind as you sip your favorite beverage and tune out amidst the hot stock conversation – you are heading more toward financial peace of mind and informed decision-making.