Should I Stay or Should I Go?

With January investment statements coming out this week, most investors will face the reality of pretty steep investment loss. January’s returns, combined with the preceding two months, have been tough on investment accounts.

This is going to lead many of you to consider pulling out of the market. Should you stay invested or should you preserve capital?

Since no one has a crystal ball, it is impossible to determine what makes the most sense. So for most people, trying to figure out the direction of the stock market is going to be tough at best. Thus that might not be the best strategy unless you are willing to get an education in technical analysis of the stock market.

So the question is not about the direction of the market. The real question is what is most important to you? How much of your investments are you willing to risk in the stock market? You also have to consider your time horizon. How long will it be before you need that money?

Now don’t mistake time as an excuse for taking risk that is not prudent. I have always felt that the idea promoted by the 7 trillion dollar financial services industry that if you are young, you can be aggressive because time is on your side.

Whether you have one year or thirty years, it only makes sense to invest in investments that have a high probability of either rewarding you for the risk that you are taking or preserving your capital.

So if you are wondering what steps to take with your investments, then consider this question: How much risk do you really want to take today?

This is a tough question to answer. Let’s say you are 50/50 on taking risk in the stock market. If that is the case, maybe you stay 50% invested and keep the other 50% safe.

If you want to cut way back on risk, then maybe you are 80% in safe investments and 20% in the stock market.

Before you start that process, it is always good to look back over the past five years and see what type of growth you have had in your accounts. If you have had great growth and you are only down a little bit this year, you might find that it makes sense to just protect everything. This information might help make this decision a little easier.

Most importantly, determine when you are going to need this money. If you are nearing retirement in any type of market, whether good or bad, it is important to be thinking about capital preservation and protecting your future nest egg. If you have a long time ahead of you, then your decision is more of a strategic one that balances risk and reward.

So if you move to safety, when do you know that it is safe to move back into the investments? Join me tomorrow for part II of this series and we will discuss some strategies for getting back into those investments again.

Finally, on Thursday, we will discuss what type of investments that you should consider if you are staying invested.

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