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Phil Lenahan helps a man who’s mulling a move away from investing.
BY Phil Lenahan
I know cooler heads prevail when the stock
market takes a turn for the worse, but I’m finding it hard to resist the urge
to cut my losses and pull out of all my investments. Talk some sense into me,
We’ve been going through an economic
cycle that challenges the fortitude of even seasoned investors. When people
make investing decisions based on emotion, they make mistakes. Just when things
are at their worst and emotions are raw, they capitulate and sell — either at
or near the bottom. Then, as the market anticipates improving economic activity
(even as we still feel gloomy) and begins to recover, we stay on the investment
sidelines. That’s a double whammy. We lose big on the way down and miss the
is a better way for the average investor that takes the emotion out of
investing decisions. It’s simple and it consists of three practices:
dollar-cost averaging, asset allocation and rebalancing.
With dollar-cost averaging, you
commit the same dollar amount on a recurring schedule to purchase investments.
A simple example is making a 10% contribution to your 401(k) plan every pay
period. The biggest benefit of this approach is that it provides the discipline
you need to invest. Rather than spending all of your income on consumables, you
are regularly saving and investing for the future.
Dollar averaging also avoids
attempting to time the market, but rather provides a way to purchase stocks at
an average price over time. Many individuals get burned by trying to outsmart
the market. Even if you choose to invest part of your portfolio by timing the
market, I encourage you to use dollar-cost averaging for a reasonable portion
of your investment activity.
Diversification is an important
investment principle that simply means you shouldn’t put all of your eggs in
one basket. It’s a scriptural principle, as well. Ecclesiastes 11:2 says, “Give
a portion to seven, or even to eight, for you know not what evil may happen on
Asset allocation, another term for
diversification, recognizes that different asset classes behave in different
ways. By allocating your investments among basic investment categories, you can
achieve a balanced return with reduced risk.
asset classes include equities (including small, large and foreign), bonds,
real estate and commodities. Visit with your investment advisor to discuss an
appropriate asset allocation for your stage in life. As retirement approaches,
it typically makes sense to reduce the level of investment risk in your asset
because asset classes don’t tend to perform in tandem, the percentages you have
chosen in your asset allocation will shift over time. Assuming your allocation
strategy still makes sense, you should periodically “rebalance” your portfolio
to the original percentages. Rebalancing is a smart way to systematically sell
high and buy low and should be done at least annually.
Of course, following these
principles doesn’t mean that you won’t experience ups and downs with your
investments. But the principles do provide a methodical way to save and invest
for the future that provides a reasonable balance between risk and return.
God love you!
Phil Lenahan is president of
Veritas Financial Ministries
and author of 7 Steps to Becoming
Financially Free: A Catholic Small Group Study (OSV).