The Anna Maria Island Sun Newspaper

Vol. 14 No. 38 - July 16, 2014

BUSINESS

Anna Maria Island Sun News Story

Be mindful of risk

Investment Corner

In my last article here in the Sun, I made the case for why the stock market may move higher before a major correction. I also pointed out that rising bull markets usually don’t die of old age, but rather are killed by external factors, usually rising interest rates. In this article I would like to balance that optimistic view with some common sense advise on controlling risk.

The current bull market in stocks now ranks as the fourth longest without being interrupted by a new growling bear market. At 63 months, only bulls from 1921–1929, 1949–1956, and 1990–2000 have longer durations. The last one on the list was a super-bull lasting 117 months!

We could make the argument that the 19 percent correction in the S&P 500 Index in 2011 was a quasi bear market, but that would be splitting hairs. So, what does today’s investor do to make intelligent investment decisions and not fall prey to the historical trend of investors getting most excited about stocks exactly at the wrong time?

The two hardest things for most investors are avoiding the mistakes at the critical times when our emotions are influenced by fear and greed. Buying low in the middle of a crisis or recession is the smart thing to do, but many cannot bring themselves to do it. Selling some of your riskier investments while the market is still rising makes us nervous because then we won’t make as much money. Having a tempered, realistic view of both the good and bad times is important. Neither will last forever, and the ability to see through extreme pessimism or optimism is a worthwhile pursuit.

The other proper attitude to adopt is that beating the market is not a requirement for being a successful investor. It is a worthy goal, but because some of us are competitive, we are driven to take excessive risk to achieve it. The times when we are comfortable adding risk are usually the times when we feel confident. Confidence is increased as economic conditions get better over several years, but then we find ourselves that much closer to the next market decline as reviewed in the earlier part of this article.

Adding risk late in a bull market may cause the losses during the next correction to be larger than the gains made in the previous uptrend. Famed investor, Warren Buffett says, “Investing is simple, but not easy.” This process of knowing when to add or reduce risk in your portfolio is what he was referring to. Accepting that earning 8 percent when the market earns 9 percent is not a failure is a good idea.

Failure is losing 20 to 30 percent when the market goes down 10 percent, and these experiences need to be avoided or minimized to enjoy a successful investment result. Diversification across asset types and avoiding the pressure to crowd into an asset type which has been the best performer of the last year or two will go a long way to controlling risk and large mistakes.

Good luck and good investing.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.