Your Investments: Having trouble sleeping at night?

He admitted that during periods of wild market swings he had trouble sleeping.

By AARON KATSMAN
Your Taxes_311 (photo credit: Thinkstock/Imagebank)
Your Taxes_311
(photo credit: Thinkstock/Imagebank)
While stock markets have settled down from the wild volatility that we saw in the second half of 2011, many investors are still feeling a bit unnerved. I recently met with a young investor who has managed to accumulate a nice-sized portfolio for his age.
He told me he had been investing on his own, reading a lot of financial advice and trying his best to follow it. He said it was a universal principal of investing that if you are young, you should have significant exposure to the stock market because over time, there is no better investment.
He continued to spout conventional investing wisdom until I stopped him and asked, “Why did you decide to come and see me?” He seemed to know what he was talking about and I couldn’t figure out why he wanted to come and see a financial adviser? He said he had had enough of being a do-it-yourself investor. He said he was always watching business TV or checking on his investments on the Internet, and it started adversely impacting his quality of life. He admitted that during periods of wild market swings he had trouble sleeping.
I told him about a client I have had for more than a decade.
Everything was going well for him, and he was making a lot of money in the late 1990s, just like a lot of other people. Then the Internet bubble burst and he started losing money. I remember as if it was yesterday; he calling me up to get a stock quote on one of his hi-tech positions, and I told him it was down another 8 percent. He actually started to hyperventilate while he was on the phone.
This continued for a few weeks as he proceeded to lose much of what he had accumulated over the past few years. During one of his episodes I told him he should just get out of the stock market and buy bonds or bank deposits; after all, no amount of money was worth the deterioration of his health. If stock volatility was making him so sick, there was no need for him to be a “hero” to try and make a few more bucks.
Maybe you should tone it down
If markets are causing you sleeping troubles at night, or you find that when you hear that the market dropped 2% you get that uneasy feeling in your stomach, you probably have a portfolio that is way too aggressive for your personality. Forget about how the financial media says you need to invest. You need to invest in a way that won’t make you sick! Get out of a significant portfolio of your stock holdings and move to something less volatile, even if it means lower returns.
Are dividend stocks the answer?
I have written about these issues in the past, and inevitably I will get the “invest in dividend-paying stocks” comments. I like dividend stocks and I think they serve a purpose in an investment portfolio. But to think that a 3%-4% payout annually is the solution to hedge against large market drops is silly. If we have learned anything from investing history, it’s that even the bluest of the blue-chip stocks can drop 70%-80% as well. Stocks are stocks, and they can lose you just as much or even more money than they can make for you.
The advantages of slow and steady
Don’t get discouraged that you will not be the next Warren Buffett. You can still save up a large nest egg and achieve your financial goals by having a more conservative portfolio. In fact, over the last decade a conservative portfolio far outperformed traditional stock-market indices, with a fraction of the wild swings. Forget about what people say. One of the most important issues investors face is to be comfortable with their portfolios. Know yourself and your risk levels – and invest accordingly.
aaron@lighthousecapital.co.il
Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.