Three Actions NOT to Take in Difficult Investing Environments

by Joe Plemon on October 19, 2011

Always know your risk tolerance

Arthur Cashin, Director of floor operations at UBS financial services recently said that in his decades of being a professional investor, he has never seen a more challenging investment environment.  If a professional investor fears the market to this extent, what should a part time, non-professional trader do with their money in the current market?

It might be more about what you shouldn’t do. Those with less experience often make mistakes which lead to catastrophic losses in their portfolios.   Even in the best of environments, nearly 80% of part time investors lose money. With that sobering fact in mind, an increased caution of risk taking is a healthy thing.  What should you do in an environment such as this and how can you protect your money?

Don’t chase return.

When the investment markets enter a period of little or even negative growth, inexperienced investors try to chase return. They look for products that carry a higher rate of return but they forget that along with that higher return carries a higher degree of risk.  Stay within your risk tolerance and understand that sometimes you aren’t going to see much of a return.

Don’t do just to do.

Ever felt like if you’re not putting money to work in some way, you’re not a good investor? A seasoned investor knows that sitting on the sidelines and waiting for the waters to calm is sometimes the best way to make money. If the market is down 5% and you’re down 0%, you’re beating the market!

If you don’t understand it, don’t touch it.

Do you know what a bond fund is? How about a leveraged ETF or a floating rate loan fund? If you don’t know what they do or how they work, read up and learn.   It is YOUR responsibility to understand your investments, so, even if your financial adviser is hyperventilating about how a certain product is perfect for you, keep saying “no” until you understand and agree with his recommendations.

Bottom Line
In football, there are times for offense and times for defense. When the defense is on the field, the team counts any points scored as “bonus” points.  In challenging investing environments, you’re a defensive player. Big gains are a bonus. Wait for the next bull market to get back on the offense.

Readers:  any other tips on how to invest during challenging economic times?

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{ 1 comment… read it below or add one }

UltimateSmartMoney October 19, 2011 at 8:11 pm

I agree with your advice. I ended up going defensive in early Summer and now I am holding onto about 50% cash. I plan to get back into stock market when the trend turn Bull again. Until then I am staying put…

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