Know Your Investment Time Frame

Part IV 

Assuming you have ascertained what type of investor you are and have done your homework, you should know the following about yourself:
* What your true investment time frame is
* How the class of investments you are investing in have performed over similar market conditions or past time periods.
* What your worst-case scenario is.
* What your expected returns both positive and negative are.

An investor should always perform a fire drill in regard to his or her portfolio. Use a historical perspective to see what the worst years in the stock market would have done to your portfolio.

Key questions that should come to mind include:
* During protracted negative markets, how long would your stocks have stayed down?
* How would a diversified portfolio of stocks invested among various size categories and investment strategies have fared?
* Is there anything you could have done to decrease these losses or to mitigate the length of any downturns in the market?
* Are you comfortable with the answers you have come up with?
* Can you create a portfolio you can live with under the most trying of circumstances?

With bonds, you should be asking yourself the following questions:
* Have you selected the highest quality bond?
* Is there something substantial backing the issuer of your bonds?
* Have you selected the proper maturity of bonds to meet your needs?

When looking at risk factors, you would be wise to seek ways of reducing or transferring as much risk as you can to others. For instance, stock investors can reduce financial risk by placing stop loss orders on various individual stocks within a brokerage account. These stop loss instructions will help ensure that your stock positions are sold out during the start of a major market downturn.

Typically, investors place stop losses on an individual stock to be executed if the stock issue were to decrease by more than 10 percent. This can help to prevent even larger losses that can affect individual issues at times, regardless of what the broader stock market is doing in general. If you are holding stocks that continue to increase in value, perhaps you will want to move your stop loss instructions up with the rising stock price. Failure to have stop loss instructions on major stock holdings is a common mistake among novice investors. Make sure you cancel your stop loss instructions on stocks that you have sold. Otherwise you could be placed in a position of having to deliver stocks you no longer own. A competent stockbroker can explain these techniques and others such as hedging. In addition to using package products such as mutual funds, you may wish to consider using vehicles such as index annuities. They allow you to participate in the appreciations of various stock indexes without taking on the downside risks. These investment vehicles are backed by the financial condition of the insurance company issuing them.

Consider variable annuities if tax benefits or death benefits are a factor. Many variable annuities offer a death benefit, which basically states that your beneficiaries will receive your original investment back, plus a set amount of growth such as 3 percent or 5 percent per year as well, regardless of your account’s actual performance. Of course, if your actual account value has grown by more than the guaranteed death benefit amount, then your beneficiaries would get this higher amount. This may be another way to further reduce financial and market risk. Fixed annuities are excellent substitutes for individual bonds or bond funds. You obtain high yields in most cases without taking on financial risk. This, or course, assumes that you have selected a financially strong company with a competitive product. All of these various strategies can give you tremendous staying power. Another product worth considering is that of a managed account which provides ease of entry and exit from markets; and it is tailored to you individual needs and your tolerance for risk.