When is it time to worry?

worryBelow is a great summary about how most people try to invest in anything, let alone gold or commodities. Gold? Yep! Those become popular again when fear is in the air. But is popular the way to go? As soon as you change something, the popularity changes. If not gold, then it’s something else that fearful money seeks. Don’t be fearful; be prudent.

You see, most people see the current trend going on forever, be it lately going up, or lately going down. 2013 was a good year – so most expected the same for 2014. Well, 2014 so far is shaking the faith of many. Surprise? Not really. Here’s a short blog on Mental Landmines while thinking about investing.

This is healthy – to have a pull back once in a while reminds people the markets don’t always go up. Markets don’t always go down either. Stock can go to zero (the company is gone). You can think of many companies no longer in business. Indexes don’t go to zero – if they did, we would all have a lot more to worry about than decline in worth. This would mean there was no value no where in any economy on the globe.

As long as you still see businesses open and rush hour, those scary scenarios aren’t in play.

1a Dow decline illustration calc and JPEG instructions

The last time the Dow was near 13,261 was Dec 31st, 2012. In other words, if the Dow experiences a Bear Market, all of the 2013 gains will have been erased. Is that the end of the world? Last I checked, the world was still here in 2012. Businesses were open and there were still rush hours.

The rational approach would be to have been diversified globally and have “shock absorber” assets such as short term bonds in that allocation. Thus, what ever the Dow does, it only affects just a small part of your portfolio.

800px-Flock_of_birds_-Roma,_Italia-23Nov2008What business is the financial media in? News you might say. Nope. They’re in the business of attracting your attention and scary stories do that. Why? To sell advertising. A properly structured portfolio is going to address all kinds of markets, and as the markets change, different parts of the allocation takes over. Sometimes, everything goes down as well as up. Other times there are parts that go in opposite directions. No one knows ahead of time what the markets are going to do. They react like a flock of birds changing direction suddenly.

A good history of a mutual fund family that 30 years ago spawned a very successful investment approach that is now widely used. The DFA Model (free Morningstar login needed).

Photo source By Paolo (originally posted to Flickr as Birds) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

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