(1) If you don’t understand how an investment works, don’t go there. Inverse and leveraged ETFs fall into this category for most people…swaps and other derivatives often underlie these securities. There are plenty of high-quality investments (like stocks & bonds) that are much easier to understand. It’s better to be safe than to get burned by an investment that zigs when you’re expecting it to zag.
(2) Do due diligence. You wouldn’t spend thousands on a car before doing a little bit of research on it, would you? You would at least get the CARFAX report, right? The same can be said for most investments. You should have some prior knowledge of an investment’s risk/return characteristics and know how it would fit into your overall portfolio BEFORE you pull the trigger.
(3) Think long-term by tuning out the noise. Part of the noise I’m talking about here is daily price fluctuations. If you’re a long-term investor, you can (and should) ignore those. You can also ignore most of the investing “experts” you see on TV (or the internet these days); they are usually featured for the conviction they display when the camera is rolling and not necessarily their investing prowess.
(4) Don’t go robo. Why? Think 2008. Faulty algorithms were largely to blame for the sub-prime mortgage crisis in 2008. Algorithms underlie robo-investing programs. Also, having come into existence in 2008, the technology is largely untested in severe market down-turns. The robos might work fine in a down-turn. Then again, they might not. I don’t know about you, but that’s a risk I’d rather not take with my money.
(5) Consider working with a credentialed (CFP® or CFA) human. They can often be more objective and level-headed with your money than you can during times of market tumult. In other words, most of them aren’t going to sell all your stocks after the market has bottomed. They will have considered your risk tolerance and time horizon when crafting your asset allocation and are thus prepared to help you weather just about any financial storm that might come along.
Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California. Brian is a CERTIFIED FINANCIAL PLANNER(TM) professional who specializes in investment management. He holds a MBA and a Master’s Degree in Financial Analysis. He has over a decade of experience helping clients achieve their financial goals and occasionally teaches investing and financial planning courses as an adjunct professor.