A Railroad Track or a River?

TrainSome investors follow what might be called “The Railroad Track” theory of investing. That is, you see the train (danger) coming towards you and think the only option is to get off the track ( out of the market). It is understandable how some individuals might follow this notion given all of the uncertainties within the financial markets. In reality, investing is more like fishing in a river where you seek a “stream” of future earnings. That’s what investing in stocks is all about, owning a piece of the profits from companies.

Are Stocks Risky?

The underlying premise of “The Railroad Track” theory is that stocks are risky. Part of this characterization can be traced to financial DNA. Investors nearing “normal” retirement age today had parents who were children of the Depression and those wounds never really healed. These financial scars were passed on.

Remember, you invest in stocks because you “need” the long-term returns in order to offset the ravages of living cost increases. Even with relatively modest inflation levels, your living expenses will roughly double in 20 years. Investing in stocks is the best path we know for offsetting these expenses. The alternatives aren’t so great. As the old adage goes, “investing in certificates of deposit is a way to go broke… slowly”.

Stay on the Track

One of the most important ways that we add value to our client relationships is by helping clients become “all the time” investors. That is, not mistaking normal stock market volatility for a train heading straight towards you. As a group, investors often pull money out of the stock market just as market returns are moving higher. This has certainly proven true in the post 2008 period. Stock funds have seen net redemptions in every calendar year since 2008 while market prices increased.

Perhaps the most difficult investing truth to accept is that sometimes the stock market just drops for no identifiable reason. Sure, you can turn on the TV or look at the web and find an infinite number of “explanations” but really these are just words without much meaning. Over-analysis of news events and information can become a direct path to unwarranted anxiety and missteps. Market prices change with new information. That’s it, plain and simple. No fancy explanations required. Ready for a real conversation?

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