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November 7, 2011

Understanding and action are required to navigate the current market.

Michael A. Pollick’s November 7th article in the Wall Street Journal presents seven pointers to “Rest Easy in a Crazy Market”.  Some of the points need to be emphasized and some to need to be tweaked.
Understanding your risk tolerance, tolerance for pain, tolerance for volatility, etc. is difficult for most people.  My clients often sound like they understand their tolerances.  As I have heard them and observed their actions  I can recognize their inconsistencies.  Discussing the inconsistencies helps them understand what is in their portfolios and what the expectations are for their portfolio. 
It is important for investors to have a plan that allows them to sleep at night.  They also need to understand what their financial goals are what is needed to achieve those goals.  Clients often seem to be reacting to the media.  The media’s purpose is the attract readers, listeners, etc.  Bad news seems to attract more people than than good news.  Most of the “information” is static.  Investors need to know what their investment philosophy, approach, time horizon, etc. and ignore what is not relevant.
The article encourages investors to find funds with a wider net.  Not all funds with a wide net are good for everyone.  Funds could be following a strategy that is not consistent with the needs of all their investors.  Having separate funds for different holdings and strategies increases the inventors ability to construct a portfolio that is appropriate to their individual situation. 
The article notes that “Investors have a bad record of calling market tops and markets bottoms.”  Not only is it extremely difficult to know the future, it is also extremely difficult to know the consequences of future events.  This makes market timing unlikely to benefit an investor over the long term.
Knowing what your investment strategy, understanging your investments, knowing your investment goals, knowing your time horizon, etc. helps prevent an investor form shooting themselves.

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