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Reality versus the Media


Saturday, March 13th, 2010

There’s an old saying that there’s no news like bad news. If so, then the recession has given the media plenty of fodder to feed the hungry masses. As would-be retirees are forced to scale back their retirement plans, or even delay it, the news is full of articles pointing to the collapse of modern portfolio theory and diversification.  They point out that even these concepts of investment planning weren’t enough to stave off a major decline in market values. People have been led to believe that the financial industry has failed and the truth is kept locked away.

     The idea behind diversification is the same as not putting all your eggs in one basket. If one stock turns out to be a poor investment, it won’t have as much of an impact because your other stocks will be of a different industry and type that will not be affected by whatever hurt the one. The question that’s been raised though is, what happens when an event occurs to make every basket fall? Diversification doesn’t mean much when the entire globe runs into a recession; the best that can be achieved is limiting the losses that are sustained.

 

     Unless you have resources of a Hedge Fund manager and skills to match, there probably isn’t a way to avoid massive recessionary downturns, even with due diligence. Fortunately, there’s no need to. The measure of a portfolio’s success doesn’t lie within just a few years, but an average over its lifetime. In free market capitalism, volatility should be expected and should come as no surprise. Even after a precipitous decline in value, the overall value of the portfolio will be higher than it would have been had it been invested in less risky assets such as bonds or savings accounts.

 

     Fear is the only true enemy of proper investing technique. The ability to think long term will make the down times less threatening. Whenever you start hearing about how others have lost money in the stock market, try thinking of what would have happened if you had simply saved all your money instead. Even after a devastating decline, it should be obvious that your holdings are still greater than what would have been achieved otherwise. Don’t let the media trick you out of your confidence, and keep that retirement date set!



Article by Daniel Croxton

The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com