by Jesse Anderson, CFA
What do you want for Christmas? This is a common question we likely all hear from friends and family this time of year. While I doubt any of us will be creating a Christmas list to send to Santa, we all have secret wishes or cravings that would put a smile on our face Christmas morning.
Many Christmas wish lists include the latest gadgets or new products. Although our finances often take a back seat during the holiday season, many investors have a subconscious wish list for their investments. Here are the top three investors are unlikely to find on Christmas morning or in 2013.
The ALL CLEAR signal
Since the financial crisis, millions of investors have moved to all cash or created a more conservative portfolio. It is another perfect example of buying high and selling low. The exact opposite of what investors should be doing. They are all waiting for the economy to improve, unemployment to go down, a balanced budget, or some other signal to give them the peace of mind that it is safe to get back into the stock market. Just like previous cycles, investors will come back in near the top just to watch their portfolios decline in the next bear market.
A portfolio full of HOT stocks (no losers)
Everyone agrees diversification is a good thing, yet no one wants to see any part of their portfolio underperform. When an investor creates a diversified portfolio, they have to face the fact that not all the pieces will be top performers. However, the typical response is to abandon the poor performing pieces for the next hot stock or asset class. Remember, the goal of diversification is to reduce the risk. This is often hard to measure or quantify for individual investors. You don’t want to have all your money in the HOT stock only to watch it fall into a tailspin.
Historical stock market returns without the risk
What is the historical return of the stock market? Most will answer 10 to 12%. Individual investors often interpret this to mean their money will grow each year, year after year, by a similar amount. No one considers the negative 20 or 30% bear markets you will experience. Since we should all know by now no one can consistently time the market, investors need to employ a strategy that will create the best long-term outcome in both good and bad market conditions.
Santa is unlikely to provide all the gifts investors want this Christmas season. That doesn’t mean you should give up and not invest. First, all investors need to become more educated on how the system works. Then, they can find a consistent approach to employ with their portfolio over the long-term while remaining sane and unemotional.