Bad Choices Get Rewarded

It can be really hard to behave correctly if we see examples of people being successful while doing things we know have higher odds of a bad outcome (e.g., buying lottery tickets). But as you’ve probably learned by now, investing isn’t always fair. Bad choices get rewarded, while people who made prudent decisions sometimes appear to be punished—at least in the short run.

So even though it’s tempting, I strongly encourage you to judge the investment advice you receive based on the validity of the principle (process) and not the outcome. Let me share a story about a friend who had stock in his grandmother’s mining company. Over time, the family had invested and lost millions trying to keep the business afloat. As you might imagine, the family stories around the business made it seem like a sacred thing to protect, regardless of the cost.

At this point, the stock had reached a low of $2 a share and my friend didn’t know what to do. He worried that if he sold the stock, then it might recover and his family would regret the sale and wish they’d kept it. I acknowledged that if he sold the stock and it doubled or tripled—which was a real possibility—he’d feel badly. But the catch was that if he kept the stock and it went to zero, he’d feel much, much worse.

The underlying factor was that he needed to make a decision based on a principle (e.g., did owning this stock support his long-term goals?) instead of the emotion and family lore surrounding the stock. There’s no guarantee that good investment decisions won’t lead to a painful result. But we need to remain committed to making good decisions based on sound principles and not just luck or emotions.

This article is written by one of our senior advisors, Robert W. Hanson Jr., CFP, MS. Bob is a graduate of DePaul University's College of Commerce, and is a board Certified Financial Planner, (CFP).  He also found time to earn a Masters of Science Degree in Financial Services from the College for Financial Planning in 2003.  Bob has also taught investments at Northwestern University to students in the school for Continuing Studies.

Three Keys to Surviving Market Turbulence

From the desk of Mark LaSpisa, President and Managing Advisor: Three Keys to Surviving Market Turbulence

All too often, investors react to a sharp drop in prices by panic selling or digging in their heels despite deteriorating fundamentals. But more thoughtful investors see a correction or downturn as an opportunity to review the risks in their portfolios and make adjustments where necessary.

Most stock market investors are looking for the same result: strong and steady gains of their investments. Dealing with a period of sustained falling stock prices is not easy. All too often, investors react to a sharp drop in prices by panic selling or digging in their heels despite deteriorating fundamentals. But more thoughtful investors see a correction or downturn as an opportunity to review the risks in their portfolios and make adjustments when necessary.

Any time you are feeling nervous when confronted with any adverse market event -- whether it is a one day blip, a more lengthy market correction (a decline of between 10% to 20%), or a prolonged bear market (a decline of more than 20%) -- take time to review your portfolio and call your Vermillion Financial Advisor. It will help you in dealing with the difficulties that volatility can bring. Here are three suggestions to help you and your portfolio survive market turbulence.

Talk with your Advisor. Your Vermillion Advisor can help you separate emotionally driven decisions from those based on your goals, time horizon, and risk tolerance. Researchers in the field of behavioral finance have found that emotions often lead investors to read too much into recent events even though those events may not reflect long-term realities. With the aid of your Vermillion Advisor, you can sort through these distinctions, and you'll likely find that if your investment strategy made sense before the crisis, it will still make sense afterward.

Keep a long-term perspective. The only certainty about the stock market is this: it will always experience ups and downs. That's why it's important to keep emotions in check and stay focused on your financial goals. A buy-and-hold strategy -- making an investment and then holding on to it despite short-term market moves -- can help. The opposite of buy-and-hold investing is market timing -- buying and selling investments based on what you think the market will do next. Market timing, as most investment professionals will tell you, is risky. If your predictions are wrong,  you could invest when the market is on its way down or sell when its on it's on its way up. In other words, you risk locking in a loss or missing the market's best days.

Update your Capital Preservation Policy. While it's important to remember that periods of falling prices are a natural part of investing in the stock market, your written capital preservation policy (CPP) is pre-planned action step(s) to be taken when volatility raises above normal levels. Your advisor has a variety of tools to use to address volatility in your portfolio including automatic stop losses, dollar cost averaging, individual stock and stock index options to hedge their portfolios against a sudden drop in the market. Perhaps the best move you can make is reevaluating your risk profile which limits your CPP for taking overall risk.