In my last article, I laid out my dissatisfaction and frustration with some of the conventional wisdom that misguided investors. I was so frustrated because finance does not exist in a vacuum. Finance intersects real life and the consequences are life changing.
In the 2008 financial crisis, investors were hit from two directions. They simultaneously suffered an increased risk of unemployment and a plummeting investment portfolio. If an investor is ever laid off because of economic events beyond their control, the last thing they need is a plummeting portfolio value. Life emergencies may require that you need to make withdrawals when least expected. We don’t always have the option of riding out the storm, especially because our working years are finite.
If one is invested in only the stock market, making withdrawals is trickier than it seems. How do you know if you are going to get out at a smart time? Are we bound for prosperity? Is the next crisis months away? In reality it is almost impossible to accurately forecast these events consistently over a lifetime. With investment predictions, time is the only clarifying factor.
When creating my portfolio, I wanted to find a strategy that avoided the roller coaster of emotions. Investing done properly should be void of emotion, because fear and greed can lead to poor decision-making. Volatility has the effect of compounding these emotions, creating a messy situation with the possibility of ending horribly.
To avoid these emotions, I wanted stability in my portfolio. I wanted a portfolio that would rarely lose money, and when it did I wanted it to be minimal. This would allow me to put money in when I had it, and take money out when I needed it. Simply put, I wanted a super-charged bank account offering competitive returns compared to the stock market, but with considerably less risk.