How to Buy an Umbrella - Old Peak Finance

How to Buy an Umbrella

May 24, 2013

blog_howtobuyanumbrella

How to Buy an Umbrella

May 24, 2013

Anyone who has lived in New York, Hong Kong, London or another city where you walk a lot knows the worst time to buy an umbrella: when it’s raining.  They’re expensive, and you’re already soaked.

There are lessons here for an investor.

If you sell after the market has fallen, it’s too late.  You’re already wet (the stocks have already declined), and “protection” (for example, buying bonds or other low-risk products) is probably more expensive.  Conclusion: buy your umbrella when the sun is shining, as it is now.

What kind of umbrella do you buy?  The investment world has many products that promise protection from stormy weather – hedge funds, variable annuities, high-dividend stocks, managed futures, etc., etc.  They are usually rich in fees, and they seldom advertise what you are giving up when you buy them.  Worse still, many investors buy a big, expensive umbrella just as the clouds are parting.

I recommend an umbrella that costs less and provides better protection.  It’s a long-term investment plan.  You decide, up-front, how much risk (stocks) you can take, and stick to that mix, regardless of the weather.  Make your decision when the weather is good, but based on estimates of how badly your portfolio may suffer when markets decline.  For example, in the past 10 years, a mix of 60% stocks and 40% bonds grew by 8.2% annually, before expenses.  But its worst 12 months was down 33%.  If you can’t accept that risk, consider a mix with a lower percentage of stocks. Historically, stocks have rebounded.  But if you have sold, you’ll miss the rebound.

In investing, the best protection is a well-thought-out plan.  Make one now — on your own or with the help of an adviser — and commit to it, before the next storm arrives.

This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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