| |
We always hope for the best when we
enter into an investment, but what happens when things don’t work
out as planned? Follow this simple advice to make the most out of a
bad situation.
My mother-in-law is an avid gardener. She really enjoys
springtime—tilling the soil, preparing the rows and planting seeds.
It’s easy for her to imagine a lush garden bursting with produce.
But not every seed planted will result in a harvest.
If a surprise late frost destroys her potatoes, she doesn’t waste
time fertilizing, weeding and watering the blackened plants. She
cuts her losses and replants with something else. It’s the same way
with investing. Not every investment is going to bear fruit. Some
will lose money. Others may not earn as much as they should.
You must have a strategy in place to invest successfully. That
includes a strategy for when investments don’t perform as well as
you’d hoped. As the old country song says, “You’ve got to know when
to hold ‘em, know when to fold ‘em, know when to walk away, and know
when to run.” Of course, investing isn’t a poker game of chance, but
it does require diligence and action.
So what do you do if your investments decline? The result of a
decline can be because of macro factors or micro factors. Knowing
which affected your investment will guide you in determining the
best course of action.
Macro factors are events based on large, all-encompassing events
such as an economic recession, a bear market, or reactions to acts
of war or terrorism. A stock declining in value as the result of an
overall market drop would be a ‘macro’ factor. A bond mutual fund
losing value because interest rates go up is another example of a
‘macro’ factor.
Micro factors are smaller events where the effects are narrow in
scope. Changes in the management of a mutual fund, pending lawsuits
or regulatory investigations of a company whose stock you own are
three examples. Or maybe the company’s products aren’t as
competitive as they used to be or they’ve been found guilty of
accounting fraud.
When an investment is being affected by macro events, it may be best
to sell all or a part of the investment and keep the money safe
until the situation changes and the risk is reduced. War or an
economic recession is a good example. If you are uncomfortable with
further potential loss then it is better to move to cash and ‘keep
your powder dry’.
But if micro factors were the main cause of a decline in value then
it may be better to sell that investment and put the money into a
different company or different sector of the market. For instance,
if Microsoft had a bad earnings report released and it looks like
their planned product releases aren’t being well received, you might
want to find another stock that is performing better.
Lastly, don’t emotionally beat yourself up if one of your
investments fails to perform as you expected. You can’t control the
market but you can control how your respond to the market. Don’t
ignore the investment or deny its lack of performance. Take action
yourself or seek competent professional advice from someone who has
your best interests at heart.
My clients expect me to keep a close eye on their investments and to
take action when necessary. And we have proprietary systems in place
to help us do that. What strategies does your advisor employ? Do
they have a logical and prudent plan of action, or are you told to
“hang in there, it will come back,” while they do nothing to stop
the bleeding in your account?
That strategy might work during a bull market but not during a bear
market. Besides, it will do nothing to protect you from micro events
that affected the likes of Enron and World Com. Make sure you or
your advisor are diligently protecting your wealth. Actively monitor
each investment and keep an eye on both the big and the little
picture. And take action when an investment goes bad.
If you have any questions about this or any other financial topic,
I’d love to hear from you. You can reach me online at
www.guardingyourwealth.com or toll-free at 1-877-827-1463.
Mr. Voudrie is a Certified Financial Planner and President of Legacy
Planning Group, Inc., a Private Wealth Management Firm in Johnson
City, TN.
|
|
