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Investing in Stock and the Planning Challenges it Represents

Let’s make one thing very clear off the bat.  This is not a recommendation to buy or sell Tesla, or any other security for that matter.  It’s a challenge to think before you act and to take a deeper look at your investment strategy.  Anyway, a few days ago Elon Musk, Tesla, Inc’s chief executive, tweeted that the company had a plan and financing secured for a buyout of Tesla’s stock.  Within a very short timespan, the price of the stock rocketed over $30 per share as investors anticipated being able to buy the stock, hold it for a short while, and make a tidy profit when the buyout occurred.  What a better way to start your day than to see a bump in your portfolio from that stock purchase you knew was “the one?”

The trouble, of course, is that it very quickly became unclear whether the tweet reflected accurately on reality.  Normally such an announcement doesn’t take place with little to no warning.  It may very well be legit, but the doubt that was cast (and the decline of the stock price over the following 2 days) has brought light to some of the problems with do-it-yourself investing. 

One takeaway lesson is that trying to time the market can be very difficult, or even impossible.  With the speed at which information flows, the Efficient Market Hypothesis suggests that you are likely not going to be the first one to have information and to make changes to your portfolio.  The idea is that, since the market is efficient, it reacts more quickly to change—therefore it is more difficult to take advantage by correctly timing purchases and sales.  This is more true with more efficient markets, such as with large U.S. companies. 

Another thought is that immediately acting on news or jumping on bandwagons has risks.  While it’s true that you may be able to “ride the wave,” you may find that some of the time that wave isn’t headed in the direction that you thought. 

Finally, even if it could be a successful transaction, sometimes the amount of risk being taken doesn’t make sense given your goals.  In other words, the risk of losing money with a given investment may be greater than you are willing or able to bear if things go wrong. 

What actually makes the most sense is to first identify what your goals actually are.  We don’t subscribe to the “make as much money as possible” goal either.  What is that money for?  Will you be using it for retirement?  How much will you need?  When will you need it?  How many years will the money have to last?  Do you want some left over?  Do you need to fund goals besides retiring comfortable?  What does “comfortably” even mean? 

After defining these goals, choosing your time frame, deciding on how much risk you are comfortable with, and taking a full look at your starting point, you can start to construct a portfolio that makes sense and that has relatively higher odds of success.  You can conduct research on potential trades to see whether they fit what you are trying to do, and avoid taking unnecessary movements—no matter how tempting they may be at the time. 

Just remember that hindsight is 20/20.  For every investment that pays off, there is another that failed. As humans we tend to remember our own victories and classify the failings as someone else’s fault.  We are also sometimes not so great at taking a look at the big picture.  We’ll remember the “win” and forget that the rest of our money is sitting in investments that have lost out to inflation.  In summary, don’t sweat it if you missed out on “that big trade.”  Sometimes reducing portfolio risks by simply not taking them unless necessary is the smartest decision.

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