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3 Questions Every Confident Investor Should Ask

So this bull market is now nearly 11 years old.  It started in March of 2009, and apart from a couple of corrections, it hasn’t strayed too far off of its upward course.

That’s great, isn’t it?

Well, yes and no. On the one hand, if you’ve stayed in the market the entire time, it’s been pretty good for your overall rate of return. On the other hand, markets like these tend to bring out the worst in investor behavior.

When stocks are up for extended periods of time, people often think it’ll go on forever.  Likewise, when they’re down in bear market territory, people tend to believe the same thing.  This can cause them to make irrational decisions based purely on where they’re guessing the market will be sometime in the future.

This bull market for the S&P 500 may have you thinking that it’s time to “raise the stakes” and increase your allocation to equities for fear of missing out on any potential future returns.  But before you decide to do that, it’s important to consider three questions.

First, if you make this investment and it works out the way you think it will, how will your life be different?  Think about it.  What we typically discover is that people will admit that even if everything works exactly as well as they’d hoped, they would only see, at best, marginal improvement in their current situation.  In other words, they find they’re taking a risk without much of a personal reward.

Second question to ask yourself: If you make this decision and you’re wrong about how you think it’ll turn out, how would your life change?  In this instance, if the outcome turns out badly, people often see the consequences being much, much worse: they see a big chunk of their portfolio gone, with no chance to recover in time.  In severe cases, they could face bankruptcy, divorce, constant anxiety, any number of things.

Third question:  Have there ever been times in your life where you were absolutely certain of a particular outcome, but then it didn’t work out as planned?  I would imagine so. When you think about it in those terms, about any of your failed past predictions, you might come to realize that while a positive outcome would be nice, there is the very real risk that it won’t happen the way you think, and you’ll wind up with serious, possibly devastating results.

The point here is that hasty investment decisions that stray from your long-term strategy are, more often than not, a bad idea.  Whether it’s out of “raging bull” overconfidence or market fears during a downturn, volatile markets can cause even the savviest investor to do the wrong thing.  This is why having a strategy, along with an advisor who aims to keep you rational, may very well be the best thing you can do.

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investments purchased and/or investment strategies devised by LCG) will be either suitable or profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

The S&P 500 Index is an unmanaged index and includes a representative sample of large-cap U.S. companies in leading industries. An investment may not be made directly in an index.

Rick Plum is a registered representative of, and offer securities through, Lucia Securities, LLC, a registered broker/dealer, member FINRA/SIPC. Advisory services offered through Lucia Capital Group, a registered investment advisor, and an affiliate of Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

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