The fear of losing

I want to highlight one of my favorite Bible parables, the Parable of the Three Servants (Matthew 25:14-30).

To paraphrase, a man was going on a long journey and gave three of his workers some money to take care of while he was gone, with the intention of finding out which he could trust with more responsibility. Two of the workers invested the money and the return was double, the third worker was afraid to lose the money, so he buried it. When the man returned, he praised the workers who invested the money and gave them more responsibilities and ridiculed the one that was afraid of losing his money.

This parable could be used today in the exact same manner with investment ideologies. I hear all the time from prospective clients, “Why should I invest in the market when I have never lost any money by staying away?” Their alternative is to stay in cash, most commonly through their bank account. The reality is, these monies are depreciating.

Did the third worker do anything wrong? He actually lost money due to inflation. In today’s terms you are looking at an inflation rate of 2%, and historically speaking over the last several decades inflation averaged 3%. At these rates your bank account or even a certificate of deposit will not keep up with inflation. Your money is losing value year over year.

When any investor begins his or her journey, a comprehensive plan that includes goals, strategy, term and risk tolerance needs to be in place. Remember that this column is referring to investors, not traders. Traders are looking for short-term gains by buying and selling using a comprehensive educational guess as to which direction the investment will move. An investor is looking for long-term gain by deploying capital into equity and debt investments with the decision based on current and future fundamentals.

I simply want to express my insights on the alternative to doing nothing and begin earning something. After all, we always want our money to work for us! For now, let’s overcome our most difficult hurdle: The fear of losing hard-earned money.

We are all guilty of this, you would not be human if you were not. There are many factors that create fear when it comes to investing - political agendas we cannot avoid, economic indicators that fluctuate frequently, leadership changes and just plain fraud. Overcoming this fear is difficult, so what do we do? Instinctively we overcome fear by education, study and practice. These are rituals that help promote confidence and good decisions. Letting these rituals be the foundation of your investment strategy leads to success.

Fear is not all bad, it keeps us attentive. We cannot let it keep us from progressing. In order to manage fear, we must first be willing to face fear and understand what it is that makes us afraid.

Once you have shifted your mindset to the idea of creating stability for a better more sustainable future, the next step is to reduce the fear logically. The fear we have is directly related to investment risk. When you invest in the market there is always some degree of risk. However, when you do not invest in the market there is also a degree of risk. This includes inflation and other monetary policy risks. “Out of the market risk” is predetermined and foreseeable. For example, you know that the rate of CDs is below the long-term inflation rate. In other words, you are buying the risk of accepting a lower yield. “In the market risk” is not foreseeable in most cases such as the risks previously listed.

Besides studying and researching, another key strategy used to minimize risk is diversification. This refers to the adage, “Don't put all your eggs in one basket.” There are two stages of diversification. Start by determining risk tolerance. Meaning, how much money do I want to have at risk with the intention to earn higher returns and how much needs to be guaranteed or insured with no risk and a lower return?

If you are unsure where to start at this point, using your age is a good way to begin (ie. 60 years old = 40% risk/60% guaranteed). Everyone is different so this ratio will not be the same for your friends or family. The first stage percentages are allocated to broad investment vehicles such as the stock market, real estate, insurance and your bank. The second stage includes diversifying amongst those broad vehicles.

The stock market has an array of vehicles you can use; individual stock (common stock and preferred stock), exchange-traded funds, mutual funds, real estate investment trusts, bonds or other treasuries. Real estate is any tangible asset, the most common is a house, land, art, cars and jewelry. As for the guaranteed and predictable investments, insurance companies offer life and annuity policies. The bank has savings accounts, CDs and money markets to offer. Government bonds and other treasuries can fall into this category as well.

The takeaway here is do not be afraid to invest, be confident. Begin with a comprehensive plan that deploys tailored strategies built for your needs. Diversify your money in a manner that unforeseeable events will not redefine your goals or alter your strategy. Understand what you are investing in and how the investments work. Most of all, have faith in your strategy and do not let your emotions make decisions.

I look forward to digging deeper in the months to come and wish everyone great success in their financial endeavors. 

Here is wishing our community a very Merry Christmas and a Happy New Year!

Curt Pouyer is an investment advisor with Montgomery Wealth Management. Contact him at cpouyer@montgomerywealth.net.