I’m sure we all remember our parents (or at least our mums!) saying, “Don’t touch that pot, it’s hot and you will get burned.” So, why didn’t we learn that lesson from our childhood? I will leave the in-depth analysis to someone trained in human psychology, but I will comment on what happens when we don’t heed that advice.
We get burned!
So, what does all of that have to do with this piece in the finance and planning column? Because when it comes to investing, when we touch something truly hot, well, we usually get burned.
The fact is, if you truly know what you are doing, you can look for the potential for positive returns (read: make money) whether the market (stock, bond or other) is going up, or down, or sometimes even sideways. When the markets are going up, they are bullish and we are bulls when we remain optimistic about the upward direction. When the markets are heading south, and we are optimistic about that direction, we are bears. When the markets have fallen by some defined percentage, they are in “bear territory."
So, what about pigs? Well, pigs get slaughtered! Greed is not a strategy, it is an emotion. It can lead us to touch things that are the hot. Again and again, many investors will want to get into something that has already done very well and they “don’t want to miss out."
Generally, nothing only goes up, and nothing only goes down. What goes up doesn’t stay up forever and what goes down, generally doesn’t remain down forever.
The lesson? Be wary of things that have done very well and now are starting to attract a lot of the “fickle” money. That money may come in quick, and can usually leave just as quickly when the party starts to unwind. A well-diversified, common sense portfolio can help weather the swings of the markets (however diversification does not protect against market risk).
Remember, bulls and bears can make money, pigs, usually, eventually, get slaughtered. If you don’t know what you are doing, seek the counsel of a talented, independent planner.
By Kashif A. Ahmed, president, American Private Wealth (www.AmericanPrivateWealth.com), LLC and member, Financial Planning Association of Massachusetts. Follow him on Twitter @AmericanPWealth.
Securities & Advisory offered through LPL Financial; a registered investment advisor; and member FINRA/SIPC.
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