Lesson #1: Question your assumptions. In early 2000, I had client who was a technology engineer. When we sat down to review his portfolio, I cautioned that his stock holdings were highly concentrated in tech. As a professional in that business, he waved off my concerns. “I’m diversified,” he joked. “I’ve got hardware, software and internet stocks.” A month later, no one was laughing. Over-confidence at the expense of your investments can be devastating. It’s important to poke holes in your assumptions. Ask yourself, “What do I really know about what I own? What happens in the worst-case scenario?”
Lesson #2: Long term, the market is your friend. It’s a familiar situation. You’re on a plane and your seatmate asks what you do for a living. Ten years ago, when I answered that I worked in financial services, I would brace myself for the barrage of questions – about the market, this or that fund, what’s “hot,” and so on. Today, with stock markets once again at record highs, no one is asking. People who went through the crisis are (rightly) more cautious, but sitting in cash has a long-term cost, in that their money is losing value even at today’s low inflation rates. While you should always have cash on hand for current expenses or emergencies, staying in the markets – and finding ways to manage volatility – is likely to be your best bet over time.
Lesson #3. Making a plan is more important than making money. I had two clients who couldn’t be more different from each other. One was a real estate developer who earned a staggering amount of money, which he spent freely, reasoning he would always make more. The other was a longtime school teacher who did her best to make ends meet. Instead of spending whatever was left over, she systematically invested it for the future. Guess who retired with $2.5 million in the bank? A+ if you picked the teacher. Remember that you are in control of your investments – take action, make a plan.
More to come in the weeks and months ahead. In the meantime, I’d love to hear from you. What worries you (or doesn’t)? What do you wish you knew better? Share your successes or your missteps, and how you fixed them.
Heather Pelant is Head of Personal Investing for BlackRock and is a new contributor to The Blog.