YOUR FINANCIAL FUTURE / Will You Sell Low?

By Roxanne Fleszar

Buy high…sell low. We investment advisors have heard all know about folks who have done that, whether it is buying a home at the top of the market in 2005 only to sell it when it was underwater in 2010 or those who bought stocks in 2006 and sold at the low in early 2009. It is hard to recover financially from such losses so how can you try to avoid them in the future?

First, if everyone is buying, that is a signal that you are near the top in a market. As a Certified Financial Planner for many years I can think back to 1987 when cab drivers in NY city were giving stock tips to their customers; to participants in 1999 insisting that their retirement plan add large cap growth funds that had already risen 60% plus that year to their list of investment options; to acquaintances wanting to purchase bank stocks in 2007.

What often happens to these folks when the market falls? They sell, so of course they are the proverbial investors who buy high and sell low. They often sell at the bottom and miss the rally. Or they just have such a bad taste of the stock market, that they never chose to invest again.

How does one overcome these tendencies? By determining your tolerance for risk.

There are many questionnaires that you can access online that will ask you questions about your investment experience, how you would react to market gains or losses etc. You receive a score that shows you to be a conservative, moderate or aggressive investor. You and/or your advisor can then select a model portfolio or customize one that matches your risk tolerance so that you won’t lose sleep nor panic when the market declines.

We have work with several tools to measure risk. They provide online questionnaires to clients which are insightful in our portfolio design process.

The newest is sophisticated tool called Riskalyze Pro that is a risk-assessment as well as a portfolio construction tool. Through an online questionnaire we get two important numbers, an investment amount and a devastation amount. The latter is a dollar amount from which you feel you will never be able to recover from. For example, someone in retirement may have a $500,000 portfolio and may say that if their portfolio suffered a 20% decline to $400,000 they would not be able to maintain their standard of living.

To obtain their number, they are also asked to choose between a guaranteed outcome and a 50/50 outcome. And a 100% certainty of a 10% gain and a 50/50 chance of either a 20% loss or a 50% gain etc. Ultimately, the client gets a score showing their tolerance for risk for the next 6 months. For example, a score of 45 shows a tolerance for a decline of -7% and a gain of 13%.

Of course, the next step is to compare that to an existing portfolio to make modifications to it or to design a portfolio that falls within that risk tolerance.

We know that markets rise and fall. Your goal as an investor is to have comfort in knowing that your portfolio is aligned with your temperament. There’s nothing like obtaining a good night sleep even if stock markets are moving up and down like a yo-yo.

Roxanne E. Fleszar, CFP, ChFC of Financial Resources Management Corp is a Fee-only Registered Investment Advisor in Key West, Naples, FL and Boston, MA

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