As we saw in Sunday’s big game between the Denver Broncos and the Carolina Panthers, a strong defense is a critical part of any winning strategy. It doesn’t matter how talented your quarterback is, or how many yards your star running back picks up if you don’t have a good defense to prevent your opponent from doing the same.
In football, so many fans focus on scoring points, but good coaches know that preventing points from being scored is just as important, if not more so. The same principle applies in investing. Everyone wants to talk about earning money, and those who know how to earn a lot become investment celebrities. However, it is just as important not to lose money.
Rules of Investing
Warren Buffet, who many consider the world’s greatest stock investor, is famous for his rules of investing:
Rule #1: Never lose money.
Rule #2: Never forget rule #1.
His rules may seem overly simple, but he’s on to something. Did you know that if you lose 50% in a downturn, you have to double your money just to get back to where you started? That’s doubling your money just to break even; you don’t even make a cent of profit.
If you were to strengthen your defense a bit, cut your losses in half, and still lose 25%, when you doubled your money you would have a 50% total gain, as opposed to just breaking even. A little bit of defense goes a long way in the investing game. That’s why it’s so important not to focus so much on your offense and chasing market gains that you forget your defense of limiting losses. A good offense isn’t nearly as effective without a strong defense backing it up.
Is Now the Time to Play Defense?
According to CNN Money, in less than 40 days, since the beginning of 2016, $1 trillion has disappeared from the stock market. Was some of that yours? Most people would have to answer with a sigh and a resounding, “Yes!”
In all the excitement of trying to score, or make investment gains, they may have forgotten to call the defense out onto the field. And the need for a good defense didn’t just start this year. In 2015, nearly 70% of investors lost money.
For those whose entire game plan consisted of offense, the recent stock market downturn has been devastating. It’s time to steal a play from the 30% who scored last year and see what it takes to weather these current market conditions.
At 1on1Financial, we are strong believers in a good defense. Last year, as we saw the Fed raising interest rates, oil prices dropping and the Chinese stock market volatility, we decided it was time to change plays and rebalanced our clients’ accounts to be more conservative.
As a result of this defensive move, our clients have not lost money this year. Presidential election years often cause stock market volatility, and a lot of the factors that precipitated this slump are continuing, so we plan to stay conservative and on the defensive as we continue forward.
We haven’t forgotten offense, though, and will continue to monitor frequently to see what plays are necessary to best serve our clients so that they can continue their current defense-based winning streak. If you want to take a peek at our playbook or you need help bolstering your defense, give us a call at 909-981-1720 and we would love to coach you as you position yourself to win the game.
Philip A. Board MSFS, CFS, is a retirement planning specialist and the founder of 1 on 1 Financial, an independent comprehensive investment firm serving individuals and businesses near Upland, California. Through educational workshops and a non-sales environment, 1 on 1 Financial specializes in working with employees of Southern California Edison, UPS, Esri and Verizon.