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Are you too conservative with your investments?

Investors’ behavior can be heavily influenced by their experiences. For example, the financial crash of 1929 and the ensuing Great Depression permanently shattered many investors’ belief in buying stocks. A whole cohort of potential investors stayed away from equities for a very long time, if not permanently.

Similarly, the “lost decade” of 2000-2009, when the S&P 500 stock index lost about 1 percent a year and included the financial crisis of 2008, likely caused many investors to lose faith in stocks, especially if they also believe that the game is rigged against them (as authorĀ Michael Lewis has suggested).

Market crashes and their aftermaths can cause investors to become too conservative, even abandoning stocks altogether. Those approaching or in retirement can be especially susceptible to this reaction.

One reason is that with a shorter investment horizon, you have less ability to wait out the inevitable bear markets. Another is that if you’re no longer working, you don’t have the same ability to replace or recover from financial losses. And a third is that your willingness to take risk, and suffer the psychological strains that bear markets can produce, is in all likelihood reduced.

Read the rest of the article on CBS Money Watch.

 

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