How Avoiding Big Market Losses Impact Returns

Avoiding Big LossesWe love to make money, but we hate to lose money even more. The ultimate investing strategy is the one that never loses money. Except that strategy doesn’t exist. The next best option is to control your investment risk to avoid the biggest losses.

Lets imagine someone gifted enough to guess every losing year in the stock market. Of course, it’s more then just picking the losing years. They’d have put their money in cash for the losing years but be invested in the market for every other year too. They’d have to bat 1,000 and stick with it over time.

The chart below shows exactly what their performance would look like, minus the losses in blue. Continue Reading…

Why You Must Invest In Stocks

Why You Must Invest In StocksImagine having to save, dollar for dollar, what you need in retirement. Now add in inflation. Your dollars need to keep up with the rising prices of all that stuff you’ll want and need in retirement. You’d have to out save that anchor slowly dragging down your dollar’s purchasing power.

This is why you invest.

Your money must keep up with the rising cost of inflation. In truth, inflation is what you’re really trying to beat when you invest.

Saving money is the first step in everyone’s process. Step two is to protect your savings from, and grow it faster than, inflation because your savings goes further when you do. Continue Reading…

Why You Should Own Stocks And Bonds

Stock Market LossNo other asset class lives up to the long term returns of stocks. Despite that fact, most investors don’t stick it out long enough during the periods when stocks perform poorly and the big losing years tend to drive investors insane.

Of course, accepting that losses are inevitable helps to deal with the year to year results many investors obsess over. There are ways to invest, using different assets, that help make those stock losses more bearable. By combining two assets like stocks and bonds, you get a smoother ride over time because stocks and bonds don’t always move together.

Your allocation doesn’t need to be complex either. One of the most often cited allocations is a 60/40 Portfolio. It’s made up of 60% stocks and 40% bonds. How you choose to build each portion is up for debate. Continue Reading…

How Often Stocks and Bonds Move Together

Templeton Diversification QuoteWhat happens when you combine a six year bull market in stocks with low interest rates and a persistent view the Fed will raise rates soon? You get a lot of speculation that stocks and bonds might both fall in value. The big concern lately is how will investors react if stocks fall and see the bond portion of their portfolio fall too.

The idea that stocks and bonds act as a counterweight of sorts is the basis of diversification. Having that balance disappear, could cause investors to overreact and change their allocation to stem off further losses.

To that end I thought I’d dig into just how often stocks and bonds fall in the same year and what happened the rest of the time. Continue Reading…

Dividend Growth Investing Case Study

Time is the Friend - Buffett QuoteDividend investing seemed to get more popular after the financial crisis. Not that investors didn’t want dividends before then, but a good crisis can make investors rethink and change their strategy. In hindsight, the trend toward dividends makes sense. But why?

From my perspective there are a couple reasons. The financial crisis was harsh enough that investors turned toward “safer” investments.

Dividend stocks aren’t really safer than other stocks. They have their own unique risks. By safer, I mean less volatile, which generally is true, and less volatility was in high demand after the crash. Continue Reading…