Many of these people sold out of fear but, motivated by greed, bought into the market again after it climbed in 2009 and 2010. So they lost money by selling low and buying high because they let the emotions of fear and greed interfere with their investing discipline.
Some investors take great pains to maintain equal amounts of assets that move in opposite directions. When one group of investments goes up (for example, stocks), the others go down (bonds). This reduces risk but also reduces the chances for gain. These investors need to add assets whose movements don't predictably move up or down with others in the portfolio. One way to do this is to add a pinch of spice: alternative investments, such as commodities or real estate.
Many may be reluctant to do this because most alternative assets tend to carry more risk. But ironically, adding these assets to your portfolio stew can actually reduce risk. This is because the price movements of alternative assets are usually different than those of stocks or bonds. This randomness can fortify the portfolio because it creates the opportunity for gain when stocks or bonds may be doing poorly.
What if an investor has such a conservative portfolio that he or she doesn't have much risk to worry about offsetting? Such investors tend to have portfolios heavy on highly stable short-term investments. These low-risk investments earn low returns — often so low that they fail to make up for losses to inflation over time. Adding investments that carry more risk but higher potential returns can help these investors fight inflation.
But you should be careful not to add too much of them because this may exceed your risk tolerance. Like too much spice in your stew, too much risk in your portfolio can make it difficult to sleep at night.
Ted Schwartz, a Certified Financial Planner®, is president and chief investment officer of Capstone Investment Financial Group (http://capstoneinvest.net). He advises individual investors and endowments, and serves as the advisor to CIFG Funds. Because Schwartz has a background in psychology and counseling, he brings insights into personal motivation when advising clients on achieving their wealth management goals. Schwartz holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at firstname.lastname@example.org.