Some people like to take risks. Sky divers, racing drivers and people who swim with sharks come to mind. But I’m guessing you didn’t start investing just to take risks.
In fact, you’d probably prefer it if the risks weren’t there at all.
And that’s entirely reasonable; after all, why should you take risks with your hard earned money that you don’t have to?
The problem is, most active investors are taking risks that they don’t even know are there and so when things turn nasty, they panic and do exactly the wrong thing.
Warning #1 – You’re worried about how the Euro Crisis will affect your investments
The first sign that you’re taking on too much risk is that you’re worried about what’s going to happen tomorrow. You’re reading the papers, watching the news for every little scrap of information. Not out of any great love of our 24-hour media machine, but out of fear.
Fear that the Euro might break up. Fear that Greece might be kicked out. Fear about the recession. Fear about the latest US jobs report. Fear about Chinese economic dominance.
Now, don’t get me wrong. It’s fine to fear these things for a hundred different reasons, especially if your job or business will be affected by how they pan out. But if you’re investing in the stock market for the long-term then what’s happening today should, short of nuclear war, not keep you up at night.
If you’re sceptical, then that’s just natural, but remember – most academics think that a passive index tracking strategy is the best way for virtually everybody to invest. Passive index tracking takes absolutely zero notice of the news, the economy or the Euro Crisis.
And yet, such an ignorant system manages to beat most active professional fund managers, and they in turn manage to beat most of the private investors who invest with them.
Passive indexing shows that you just don’t need to watch the news or your investments like a hawk to make a fair return.
Solutions: Stop reading so much news; review how long you have until you need to sell your investments; reduce your exposure to the stock market.
Warning #2 – You’re worried every time the market drops significantly
In early May the FTSE 100 reached 5,800 and yet in just a couple of weeks it fell to less than 5,300. That’s a drop…
