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Investing in the Unpredictable

The market is unpredictable, however much you want to believe otherwise. Instead of trying (and failing) to time your entry and exit, you should structure a portfolio ahead of time that better handles market swings.

One thing you should realize: world events happen unexpectedly. Some simply create normal oscillations of the markets. Others cause severe downturns. Most people try to rationalize in hindsight that these events are predictable. They believe avoiding misbehaving markets is possible, as if they can just jump out at the proper time and then jump back in again at another proper time.

Hindsight suggests when you should have done something, but that doesn't say anything about the present or the future. Another problem with such a view - emotions cloud when those proper times are. What the cycle of emotions tells you to do is the opposite of what you should do in the cycle of the market. Your elated emotion says "why sell now when everything is going so well?" and fear holds you back from buying low.

emotional cycle

While fluctuations are unpredictable, you can arrange your
investments to handle them. Notice I said You need a portfolio that aims to reduce volatility and exposure to
poor returns.

While fluctuations are unpredictable, you can arrange your investments to handle them. Notice I said handle - not avoid. You need a portfolio that aims to reduce volatility and exposure to poor returns.

(Larry Swedroe's investment book " Reducing the Risk of Black Swans: Using the Science of Investing to Capture Returns with Less Volatility " is a good basic discussion on how to do that.)

Both volatility and loss reduction are aims most people don't even think about. These concepts that I, and many professional advisers, use in portfolio construction are quite different than simply seeking returns. When you create a portfolio with these ideas in mind, the returns naturally come. With such a portfolio, there is little you have to change during market cycles, which reduces trading costs and mistakes when you don't constantly react to the market.

You can't avoid world events, but you can reduce the harm those unexpected events have on your wealth. That is through planning ahead of time rather than emotional reaction at the time.

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Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California) in Roseville, Calif. He is the author of the book, Wealth Odyssey . He has an MBA with a finance concentration and B.S. cum laude in physics with which he views the world of money dynamically. He has peer-reviewed research published in the Journal of Financial Planning. http://blog.betterfinancialeducation.com/.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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