Are You an "Upside-Down Investor"?

"Buy low. Sell high."

This is the golden rule of successful investing. Yet many individual investors often turn this rule upside-down, buying high and selling low.

Here's how it typically happens: At the start of the year, your savings are invested in a balanced and diversified portfolio of mutual funds. The money in your portfolio is allocated appropriately for your goals and risk tolerance.

As time goes by, some of these mutual fund values rise significantly as their share prices increase; others experience a reduction in value as their share prices decline. This change in value as a result of fluctuating share prices creates an imbalance in your portfolio and increases your exposure to risk.

To correct this imbalance, you need to sell some shares of the funds that have done well and buy more shares of the funds that have done poorly; in essence, selling high and buying low.

But, as human nature will have it, you find you're reluctant to do this. Your rationale: why sell the mutual funds that have rewarded you nicely over the past year and why put more money into underperforming mutual funds?

In fact, you feel a temptation to get rid of these losers and put the proceeds into the better-performing mutual funds in your portfolio. To act on this temptation, however, would mean that you would be purchasing new shares at higher prices and selling existing shares at low prices. In essence, you would be buying high and selling low — the telltale signs of an upside-down investor.

The nature of the financial markets creates cycles of good and bad performance. Asset classes and market sectors that do well over a specific period have the potential to underperform during the next phase of the cycle, as wiser investors ("right-side-up investors") adhere to the golden rule of successful investing — buying low and selling high.

It's a fool's errand to try to predict when and where good and bad performance will occur. A better solution is to invest with a disciplined strategy that takes the emotion out of investing and replaces it with a formulated approach to allocating and rebalancing your investments.

Because all investors are different in terms of their risk tolerance, time horizon and personality, there are many different investment strategies to choose from, allowing you to find one that is ideally suited for your individual financial goals.

Dearborn & Creggs Can Help

Don't fall into the trap of upside-down investing. A disciplined strategy for allocating your retirement savings and managing your investment risk can keep your portfolio right-side-up over the time frame of your financial plan.

Call your Dearborn & Creggs financial representative to learn about the disciplined strategies available to you in Lincoln Investment's Asset Management Program.