Improve your own ‘investment environment’
On Tuesday, we celebrate Earth Day — a day devoted to education and action on environmental issues. As a citizen of the world, you may have a keen interest in protecting your physical surroundings. And as someone trying to reach long-term financial goals, such as a comfortable retirement, you’re probably also interested in improving your investment environment.
So here are a few suggestions:
Respond to environmental factors. Over the past few years, we’ve had a favorable investment climate, marked by low inflation, low interest rates and generally strong corporate profits. And investors who have taken advantage of this positive environment have, for the most part, been rewarded. But things can change, so it’s always a good idea to understand the current investment environment, as it may affect your investment choices. For example, if it seems likely that long-term interest rates are going to rise significantly, you might need to review your long-term bond holdings, as their price would be negatively affected by a rise in rates.
Nurture your investments. One area of environmentalism involves planting seeds or saplings and nurturing them to maturity. You can do the same thing with investments — and a good way to nurture them is to give them time to grow in all investment climates. But how long should you hold these investments? You might heed the advice of Warren Buffett, one of the world’s most famous investors, who says this about his investment company: “Our favorite holding period is forever.” It takes patience to follow the buy-and-hold strategy favored by Mr. Buffett — and it also requires the discipline necessary to keep investing through the inevitable downturns you will encounter. But over the long term, your perseverance may well be rewarded.
Avoid “toxic” investment strategies. Unfortunately, many human activities are bad for the environment. Similarly, some investment strategies are “toxic” for your prospects of success. Consider the pursuit of “hot” stocks. They sound inviting, but, by the time you hear about them, they may have lost their sizzle — and in any case, they might not be right for your needs. Here’s another “poisonous” investment strategy: trying to “time” the market. If you’re always jumping in and out of the market, looking for “low” points to buy and “high” points to sell, you’ll probably be wrong most of the time — because nobody can accurately predict highs and lows. Even more importantly, you may find yourself out of the market during the beginning of a rally, which is when the biggest gains tend to occur.
Diversify your “species” of investments. Drawing inspiration from Earth Day, the United Nations has designated 2011–2020 as the United Nations Decade on Biodiversity. And, just as preserving the diversification of species is important for life on Earth, the diversification of your investment portfolio is essential for its health. By owning a variety of investments — stocks, bonds, government securities, certificates of deposit and so on — you can help protect yourself from downturns that primarily affect just one asset class. (Keep in mind, though, that while diversification can reduce the effects of volatility on your holdings, it can’t guarantee profits or protect against loss.)
Earth Day happens just once a year — but the lessons of environmentalism can help you, as an investor, for all the days and years ahead.
Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway.