– Scott Reed
Some of you may be wondering where I have been lately. I took a self-imposed sabbatical from writing my column. Twenty-five years of deadlines and contracts pushed me to take a break. The problem is that writers, especially columnists, want to weigh in on issues. I was fine until the Coronavirus came along.
We are in uncharted territory in that none of us have seen a strong market and solid economy taken down by a medical issue. You can’t say, “Well, the last time this virus took us down this happened and we expect this to happen again.”
Investors want to know what to do now and I don’t blame them. But I am not the guy that is going to tell you what stocks to buy or sell. I’ll let Kramer do that. I am not here to tell you where the bottom of this new bear market will be or when we will get back to bumping 30,000 on the Dow. No one knows when that will happen anyway. It is just a guess at best.
I am here to help you figure out how to let the markets help you get to your investment goals in spite of what is happening now. In this column I want to talk about the first and most critical step in the investment process.
Time horizon. Time horizon is the most critical factor in how your money is invested. For example, out of the traditional asset classes that the majority of investors use, when looking out over the next year, stocks have the highest potential positive returns and the highest potential negative returns. That makes stocks the riskiest investment you can have over a one year period of time. However, over a 20-year period of time, stocks still have one of the highest potential positive returns but actually have one of the lowest potential negative returns. That makes stocks one of the lowest risk investments you can have over a 20 year time frame. The problem is that you have to endure 20 one-year periods of high risk to get to the end of that 20 year period. And that can be pretty unsettling.
When an investor tells me that they want a safe investment portfolio for money they don’t need for 20 years, their investments look much different than if they tell me they want a safe investment portfolio for money they need in the next three years. If I am going to get your portfolio right, I have to know when you are going to use your money.
So, step number one is to take a hard look at your money and make some decisions on how far out you can realistically invest that money before you need it. If you don’t need your money for 10 years, it may be a good idea to leave your investments alone and let the markets do their thing. If you need money in the next two years, that’s a whole different conversation.
The Rolling Stones sang, “Time is on my side.” I would say, “That depends.”
