My Gift to You

Many investors have lost a lot of sleep lately as this year's investment returns from all asset classes except for CD's and Treasury Bonds have been one of the worst on record.  However, it didn't have to be that way.  Losses could have and should have been manageable if you had learned one simple rule from the last (2000 - 2002) market debacle.

So today I am going to give you a gift!  This gift will come in handy starting immediately and will last a lifetime if you chose to use my gift.  This gift comes from a couple of simple understandings that we all must accept.  The first concept you must fully grasp is that absolutely no one can predict the future.  Now some of you are scoffing right now saying to yourself that of course no one can predict the future.  Yet in order to catch the full concept of my gift to you, one must emphatically accept that No One Can Predict the Future is true.  I know many investors say it is true but their actions belie their reason.  Otherwise why would anyone hold onto an asset that has dropped 50%?  They must think they "know" or can predict something about the future?!

The second simple understanding that you must fully embrace to benefit from my gift today is that every investment that you will ever make from this minute forward has the potential to go up or down.  This is huge!  When you invest in anything one of three results will happen - one is it goes up.  Two is it never changes in value (highly unlikely), and three is it goes down in value.  The majority of the time most investors buy things because they believe that their selection has an above average potential to go up in value.  (The others may be shorting investments believing that it will go down.)  This is a major point for you to get your head around - because if you can grasp this, my gift will have real value.  While you invest only in the positions that you feel have the greatest chance to go up or pay a steady stream of income - there is a potential that you may be wrong and if you are wrong there is a potential that you will lose money, sometimes big money!

If you're still reading this missive than you probably agree with me that no one can predict the future and that every investment has the potential to go up or down after we place our money on that vehicle.  So here is the gift!  Employ a defensive approach to investing that contains the investments that don't work out the way our opinion of them thought it would, to small but manageable losses!  There you go!  If you're using stocks or Exchange Traded Funds you can actually enter a "stop loss" order on the exchange immediately after purchase and go on your merry way.  However on every investment you currently own or you ever make in the future you should predetermine a "worst possible case" scenario and decide a maximum amount of money you are willing to lose on that venture.  It could be 10% or whatever you feel comfortable losing, but decide in advance what clues you would need to admit what you already know.  One is that you and no one else can predict the future and two investments can go up or down.  So don't get foolhardy and go back to the lazy and misinformed concept that you're in it for the long term and it will come back.  Will GM come back?  I don't hear much about a comeback for 8 track tapes or phonographs.  Enron is long gone - yet it took 15 months for it to go from 90 to zero, there was plenty of time to hold your losses to a manageable number.

Having a plan that allows for defense will overcome everyone's shortfall when it comes to psychic ability.  In sports they say defense wins championships and if you look over the landscape of investing the same holds true.  In the end it's not what you make but rather what you keep.  While I have not squeezed blood from a rock this year - my clients have sustained losses in the single digit range as opposed to the 40% plus range.  When the market starts its comeback, which it still hasn't, we will only need around a 10% return to get back in the black - while the average investor will need around 100% return just to break even.  That is the beauty of this gift - using a predetermined stop loss does just that - it prevents your portfolio from taking big losses.  While we cannot predict the future we can control your risk!  Become a risk manager when it comes to your money.  Stop trying to be solely a future predictor.  Happy holidays to all and best wishes for a more successful 2009.  Use my little gift and I assure you it will be!