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Health & Fitness

What We Have Learned From This Last U.S. Government Crisis

With the most recent Washington manufactured economy crisis now behind us (or at least put off for a while), I thought it would be a good idea to write a little bit about the #1 question I got from my clients over the last 2 weeks:  “How is this government shutdown crisis going to affect my investments?”   This is a question about risk.  Chicagoland investors are often confused on how to best manage their stock market risk.  If you break stock market risk into two parts, I think it is much easier to understand.

The first part of stock market risk is “What to buy.”   This would be to understand the fundamentals of a company or fund, PE Ratios, and items like that.  It is a critical part of the investment process.  But, far too many individual investors focus only on this part of stock market risk.  In a strong, rising market like we have had for 3 years now this part of the process gets a little cloudy.  It seems like almost all of the stocks are improving their fundamentals and going up.  Some investments will increase in value at a higher rate than others, but in general the majority of quality stock market investments are experiencing all-time highs in their price.

Eventually, we will have some kind of crisis that will lite the match of another bear market.  The U.S. stock market will go through another stock market crisis similar to the one from July 2008 to March 2009.  It makes no difference what stocks you own when the markets decline like that – everybody loses.  Fundamentals go out the window.

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Now, in my opinion the second part of stock market risk is much more important to individual stock market investors.  That part is “When to sell.”  If you can limit your participation in the next great stock market decline, you will protect your recent stock market profits.  You will also have more money to invest when the stock market ends that bear market and decides to head higher again.

I explain to my client’s both parts of a game plan for stock market risk:  “What” and “When”.  I do not want my clients get blindsided by the next great stock market decline.  When the stock market risk level gets too high, my client’s know that we have a game plan in place to manage that risk level.  Remember that managing the risk of stock market investing is as much about the “When” as it is about the “What.”

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Search out information for yourself about the “When” part.  After reading this blog, you cannot go through another market crash and feel there is nothing you could have done about it.  They say ignorance is bliss, and I guess I kind of ruined that for you today as far as stock market risk goes.  If you have an investment advisor, ask yourself if he or she has focused only on what to buy and feels that is enough for the fee they are charging you.  Would you pay a painter full price to paint ½ of your house?

Cheers,

Ed Downey

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