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THE INVESTORS GUIDE TO SURVIVING TOTAL CHAOS
by Chris Beringer
Disaster in Japan. Chaos in Egypt. European Woes. Chinese Tightening. SEC Investigations of Insider Trading. QE2. What's an Investor to Do?
I know that sounds a bit glib, but the reality is that your portfolio should currently be constructed in a manner that takes into account your risk tolerance and time horizon. Your investment portfolio, if properly constructed, should be sufficiently diversified and comprised of a mixture of equity investments, government bonds, municipal bonds, sovereign debt, corporate
bonds, high yield bonds, hedge fund investments and private equity investments.
World issues, recent and not so recent, should remind us all that the most critical thing to consider when managing investments is diversification.
The world has always been a volatile place, riddled with deep political/religious conflicts that will probably not be resolved in our lifetimes (or our children's lifetimes). Governments try to make decisions that allow for economies to grow in sustained ways, but they are often misguided. Both of these facts are out of our control.
Despite this, economies tend to grow and inflation tends to occur. So what's an investor to do?
Here is a simple guide, but know that you should work with your current investment advisor to make sure these guidelines match your current situation:
1) Know your risk tolerance. You must understand what allows you to sleep at night. If global events are making you worried that you will have a substantial loss that is unrecoverable, you probably have too much in equities to begin with.
2) Know your time horizon. Know what the end goal of your wealth is. Is it to support your lifestyle, or is for future generations, or charitable endeavors? Knowing where the money ultimately ends up should allow you to make correct, long term, decisions.
3) Be diverse. The more things you own, the less chance for a calamity. We believe that asset classes are not usually correlated, which means that when one thing goes down, something else should go up. However, even if we are wrong and all assets are correlated, you should still be diversified! It is the only way to avoid a total collapse in a single
asset class or security.
Assuming all of your assets were in financial stocks during 2007-2009, a substantial amount of your net worth would have been eroded and you could potentially have been totally wiped out. However, if you owned many different types of securities, you knew you would suffer losses, but not a total meltdown.
In conclusion, it takes a long time to generate wealth. After wealth is created, asset allocation, diversification and risk tolerance are designed to allow it to grow in a reasonable manner that will allow you (and your investment advisor) to sleep at night, because you are preserving your downside risk.