5 "New" Rules For Safe Investing

AAA

5 "New" Rules For Safe Investing

Investors were hammered by massive declines as a recession swept the globe in 2008 and 2009. In the midst of the chaos, experts began calling many decades-old investment practices into question.

Is it time to try a new approach? Let's take a look at five trusted investment strategies to examine whether they still hold up in a post-credit crisis.

1. Buy and Hold

History has repeatedly proved the market's ability to recover. The markets came back after the bear market of 2000-2002. They came back after the bear market of 1990, and the crash of 1987. The markets even came back after the Great Depression, just as they have after every market downturn in history, regardless of its severity.

Assuming you have a solid portfolio, waiting for recovery can be well worth your time. A down market may even present an excellent opportunity to add holdings to your positions, and accelerate your recovery through dollar-cost averaging

2. Know Your Risk Appetite

The aftermath of a recession is a good time to re-evaluate your appetite for risk. Ask yourself this: When the markets crashed, did you buy, hold or sell your stocks and lock in losses? Your behavior says more about your tolerance for risk than any "advice" you received from that risk quiz you took when you enrolled in your 401(k) plan at work.

Once you're over the shock of the market decline, it's time to assess the damage, take at look what you have left, and figure out how long you will need to continue investing to achieve your goals. Is it time to take on more risk to make up for lost ground? Or should you rethink your goals?

3. Diversify

Diversification is dead … or is it? While markets generally moved in one direction, they didn't all make moves of similar magnitude. So, while a diversified portfolio may not have staved off losses altogether, it could have helped reduce the damage.

Holding a bit of cash, a few certificates of deposit or a fixed annuity along with equities can help take the traditional strategic asset allocation diversification models a step further.

4. Know When to Sell

Indefinite growth is not a realistic expectation, yet investors often expect rising stocks to gain forever. Putting a price on the upside and the downside can provide solid guidelines for getting out while the getting is good. Similarly, if a company or an industry appears to be headed for trouble, it may be time to take your gains off of the table. There's no harm in walking away when you are ahead of the game.

5. Use Caution When Using Leverage

As the banks learned, making massive financial bets with money you don't have, buying and selling complex investments that you don't fully understand and making loans to people who can't afford to repay them are bad ideas.

On the other hand, leverage isn't all bad if it's used to maximize returns, while avoiding potentially catastrophic losses. This is where options come into the picture. If used wisely as a hedging strategy and not as speculation, options can provide protection.

Everything Old Is New Again

In hindsight, not one of these concepts is new. They just make a lot more sense now that they've been put in a real-world context.

In 2009, the global economy fell into recession and international markets fell in lockstep. Diversification couldn't provide adequate downside protection. Once again, the "experts" proclaim that the old rules of investing have failed. "It's different this time," they say. Maybe … but don't bet on it. These tried and true principles of wealth creation have withstood the test of time.
  1. No results found.
Related Articles
  1. Financial Advisor

    Ready for the Fiduciary Rule? You Should Be

    Despite the opposition it faces, advisors should still plan to comply with the fiduciary rule. Here's why.
  2. Insights

    Recession: What Does It Mean To Investors?

    Understanding the business cycle and your own investment style can help you cope with an economic decline.
  3. Investing

    Tips For Recession-Proofing Your Portfolio

    Find out what to do when the sun sets on a burgeoning market.
  4. Investing

    Is Your Safe Investing Strategy Really Safe?

    Playing it too safe increases your opportunity cost and decreases your earnings in the long run.
  5. Insights

    DOL Fiduciary Rule: Everything You Need to Know

    The Department of Labor (DOL) Fiduciary Rule is a new ruling that expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA).
  6. Financial Advisor

    How Trump Could Repeal, Soften Fiduciary Rule

    Donald Trump has threatened to repeal the new fiduciary rule. Here’s what he could do if he wants to kill the rule in its present form.
  7. Tech

    Advisor Fintech Tools Aren't Waiting for Trump

    The new U.S. president might bring big change to financial regulation after he takes office. Here's how the financial technology sector is dealing.
  8. Small Business

    The Impact Of Recession On Businesses

    Find out how this economic cycle affects both small and big business.
  9. Managing Wealth

    Choosing An In-Home Safe: Features To Look For

    What to look for in a box to protect your irreplaceable belongings.
  10. Financial Advisor

    Indie BDs: Trump Should Drop the Fiduciary Rule

    A majority of independent broker-dealers want Trump to repeal the fiduciary rule, a recent survey reveals.
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center