Many times, when I talk to investors, I’m confronted with the “All or Nothing” syndrome. It’s a black and white approach to decision making. I can do choice A, or I can do choice B. There is often no thought that the investor can do a combination of A and B, and that may be a better alternative. Here are a few examples of the “All or Nothing” syndrome that I often encounter:
- I have a lot of money sitting in the bank earning almost nothing, and the market is doing well. Should I invest it all in the market?
- I own XYZ stock (usually a high-flying, high tech company) and it has gone up a lot. Should I sell it?
- XYZ stock is doing great. It’s doubled in the last year. Should I put all my savings into XYZ?
Perhaps it is easier for most people to think in absolutes (choice A or B, but not both). Also, when money is involved, we are often driven by a combination of greed and fear, which makes it more difficult to make logical decisions. It may be easier to think in terms of potential losses. If I invest everything in XYZ and it goes down 50%, my portfolio loses 50%. Ouch! On the other hand, if I invest 10% of my portfolio in XYZ and it goes down 50%, I only lose 5% of my portfolio. Of course, investing less in XYZ would reduce potential gains in the event it goes up. Clearly, it’s a matter of balancing the risk and reward.
The market is currently near all-time highs. It’s possible that it can continue to go up, but it’s also possible that it can go down. In this environment, if you plan to invest a large sum, it may be prudent to invest it over a period of time. The time period can be weeks, months, quarters, or even longer. With this approach, you get exposure to the market, but also have the opportunity to invest at lower prices if the market goes down.
When I’m asked an All or Nothing question, I often recommend something in between. It’s impossible to predict the direction and performance of the market, especially in the short-term. Plus, concentrated bets are risky. You probably wouldn’t go to Las Vegas and bet all the money that you brought with you on one bet. Next time you are contemplating an All or Nothing question, allow yourself to consider a combination of the alternatives. If you are uncertain about your investments, a financial advisor can help you with the many factors and decisions involved with investing. Feel free to contact us with any questions at info@L2Wealth.com.
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