Investing is a balancing act between the fear of missing out and fear of losing. Bull market optimism often makes it easy to forget losing is possible. It’s infectious. And the side effects can be costly.
Because greed, envy, and over-optimism around bull markets can lead to excesses in a portfolio. The stock portion grows in size, as markets rise, in relation to the rest of the portfolio. This can add to your returns in the short term. It may even tempt you to move money out of whatever is underperforming to put it into stocks. But both cases adds risk that can blow up when you least expect it.
This brings us back to the balancing act. It’s a trade-off. Gains against losses. Reward against risk. You don’t get one without the other. In fact, an excess of one means the other isn’t far behind.
So protection from losses is a critical piece of a portfolio. It needs to be weighed at all times. Especially in bull markets, when profits are easy to come by and losing seems impossible.
Because the long history of markets suggests that the current bull market is far more likely to end, like all the rest, than go on indefinitely. It’s best to prepare for that eventuality the further it drags on. Not doing so can be disastrous.
Finding the perfect balance is never easy but it means weighing the odds, diversifying, keeping the downside in mind, and not letting over-optimism infect your investment decisions.
Of course, it helps to keep some of the advice below in mind: Continue Reading…