Sushi Money

     Last Friday was one of those Ouch! kind of days… with the Dow losing over 360 points right about on the anniversay of Black Monday in 1987.   Not that 2007 had anything to do with 1987… just a coincidence to be sure.  Yesterday had more to do with rising economic concerns, options expiration and the last quarter of the calendar year.  But do you remember that day in 1987?   I talked about it here when looking at emotions and investing.  For a day that many still talk about 20 years later, guess what?  The market went up over the next few months and many people did okay that year.  Who really got hurt?  Mostly it was traders who had a lot of money as risk, as well as margin players.  When you borrow a ton of money…. in other words, use leverage to prop up your investments, then when the market volatility becomes extreme you risk losing a lot of money, and yes- making a lot of money.  But it’s not a practical approach to investing for most of us. 

     Personally, I want to be positioned so that I don’t really care over the long-term.  Of course I care how my investments are doing over time, but really- I don’t want to worry about my portfolio.  After putting your asset allocation together in a well diversified portfolio, you just let it do its thing.  If it really bothers you when the market goes down, then that should tell you something’s out of whack.  Either you are investing too much contrary to your personal level of risk tolerance, or maybe you’re worrying unnecessarily for no rational reason and watching the market too closely.  It’s easy to do, but over time it helps to gain a sense of detachment and maintain that “big picture” for where you want to be in 10-20 years.  

     If you’re close to retirement, it’s very important to maintain a diversified portfolio.  For so many of us, we invest in what we think we know.  A lot of folks invest in company stock in their 401(k).  Not a bad idea at first, and many companies require it.  But if you’re close to retirement, why put all your eggs in one basket?  A lot of folks at Enron really got hurt doing that. 

     What does diversification do for you?  It simply reduces the risk of investing, especially for individual stocks.  Mutual funds offer inherent diversification at a lower cost over time.   True diversificiation involves measuring correlation coefficients and host of other stuff.  But essentially, you want to invest in securities whose returns don’t move in a similar fashion over time.    There’s a ton of info on the web about building a diversified portfolio.  If you’re concerned, talk with your planner or advisor and review your situation.  

     I think it’s kind of like our garden in the spring.  We plant many different seeds and ”starts” for a season of growth for a bunch of different vegetables and flowers.  We don’t plant just one seed or little plant because there’s a lot of risk out there.  Temperature, water, insects, soil fertility, bunny rabbits!  If we plant just one of something we risk that it may not grow very well or produced the return we hope for.  At worst case the little plant withers and dies.  

Investing is a lot like a garden… you want a bunch of stuff in there early in the season to have a robust mix later at harvest time.  

     And for our investments, the growing season is not measured in months, but rather years!   Every time we save and invest, we are planting seeds for a new season of growth.  We may harvest a little of that at a time in future years, but unlike the plants in our backyard, with time and compounding, our investment garden will just keep growing and growing.

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