New Year’s Investment Resolutions – #1

Monday, December 28, 2009

Number 1New Year’s resolutions are typically borne from a combination of desire and guilt. For investing resolutions, people tend to look back at recent market trends. Bull markets see investors vowing to take more risk – bear markets, less. Neither, though is the right approach. Reactionary steps are neither resolutions nor sound investing.

During this week leading up to New Year’s Day, I will provide my favorite resolutions – ones that work in all markets.

Investing is filled with opposing sayings and advice. For example, “you can’t go broke taking a profit” and “sell your losers and let your winners run.” Each is trotted out depending on the market environment, but neither is appropriate for all markets.

The all-market approach starts with the realization that risk is always present. It may not always be visible, but it is there. So, when investments perform well, it doesn’t mean risk is less – just that it is hidden or being ignored. (Likewise, poor performance does not mean risk is greater – just that it is visible and obvious.)

To deal with ever-present risk, we cannot count on sidestepping it by foreseeing its approach. Although contrarian investing can help somewhat, no one can repeatedly time investing cycles. Rather, we need a sound, long-term strategy built on a thorough understanding of risk. And the risk level taken must be one that we can live with through good markets and bad.

This leads to our first resolution:

#1 – I resolve to treat risk in a consistent manner and use an investment approach that I can live with, no matter what is happening in the markets.

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