Does the Moon Have Covers?

 


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Recently, one late winter night, my four-year old son and I counted stars with one another. After a few minutes, he pointed to the bright moon and asked, “Why doesn't the moon have covers?"

"Covers? What do you mean?" I inquired. And in his own boyish terminology, he launched into a long description justifying the moon's requirements for blankets to protect itself against the weather's elements. To me, his ideas were plausible and thoughtful.

As an investor, it may serve you well to consider your portfolio's protection. Have you protected your investments during this year's volatile cold snap and will you have the necessary diversification to enjoy a potential market re-heating? The following may assist you in all types of markets.

For individual stock investors, a defensive posture served them well during the recent bear market. By employing “tight" stop losses, they created downsize protection. Even if the sell price seemed undesirable at that particular time, building a cash position with such proceeds allowed investors a chance to re-enter the market at lower levels. Risk of principal still existed in such scenarios and this strategy will not guarantee you a positive return. For many, this strategy is not proper.

If your portfolio is growth oriented, no income generation necessary, it is important to keep focus on your pre-determined investment philosophy. Even so, you should not ignore the short-term. Pay close attention to market behaviors and stick to your plan. I would speculate investors of Enron had long term goals, but little or no exit strategy. It is better to know and profit, than buy another's high price and blow it!

According to the 2001 book entitled Are You Normal About Money? by Bernice Kanner, seventy-two percent of mutual fund investors never read the accompanying prospectus. I admit the literature can be boring, however it can be extremely insightful as well. Look at the portfolio holdings and determine the primary sector allocations. You will also develop a good idea of the fund's turn-over ratio by reading the prospectus.

You should be aware of the driving forces behind all your funds’ returns. Are your funds allocated in strong positions and equally strong sectors? Or, is the money manager hanging onto the dreams and ideas of yesterday, hoping that six-dollar stock will return to eighty by year-end?

It is a good idea to evaluate your portfolio periodically and ask yourself “Why do I own these positions?" Time passes and your goals either change or come to fruition. Seasons change and you should adapt accordingly, why not institute diligent tactics for your savings? The thought you put into such procedures may help protect your net worth.

Wardlaw's belief is that familiar life elements best illustrate practical investment strategies; not typical investment jargon. With that philosophy, the author assists financial planners/advisors, brokerage firms, periodicals, and other investment information syndicates create informative and entertaining articles. For comments and questions, please contact the author at tools2invest@yahoo.com or visit http://www.tools2invest.com

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