Having "the stomach for investing" can tell you whether you’ll win…or lose

By Christopher Music

Are you REALLY a stock market investor?

When people learn that I’m a financial planner, I’m always asked the same basic questions: "What do you think of the market? What do you recommend?"

It seems that people want to have some insight as to how to profitably invest in investments such as mutual funds or stocks.

The first question an investor needs to ask themselves is this: "Am I really a stock market investor?"

What is meant by this is whether or not the individual has the understanding and risk tolerance to even invest in the market. The reason? These popular investment vehicles are known as speculative investments.

By definition, speculation means that an investor is willing to lose money in an effort to take the risk to achieve a higher rate of return. That means that an investor in the stock market will most definitely experience a loss at some point in the future in exchange for the possibility of achieving higher rates of return than one might achieve in more conservative investments.

Should you be investing in the stock market? Let’s take a short quiz:

1. When the market dropped last year and your account values went down, at any time did you have the urge to sell before they lost more value?

2. Did you choose not to invest more when the accounts were down, even though you’re familiar with the truism to "buy low and sell high?"

3. Did you actually sell investments at any time while the market was down?

4. Did you get emotionally upset or angry when your account balance was down?

If you answered "yes" to any of the above questions, then I would suggest that your tolerance for risk does not support investment in the stock market.

Speculation in these markets requires that one accept losses as part of the game.

In other words, while the risk of loss can be minimized through intelligent allocation of the money over different types of assets, the probability of loss of value at some point in the investment cannot be avoided.

Having an understanding of the risk you’re taking when you put your money in the investment markets is essential to being an investor. The blunt truth of it is if you want to sell or get upset when your accounts are down, then you shouldn’t be invested so aggressively. Only if you can confidently answer "no" to the above questions should you be invested in such speculative investments.

When you’re investing money for retirement that means you have at least 10 years of time to leave the money alone to grow. If you need the money before 10 years, then in most cases the stock market is definitely not the place to invest the money.

Alternative Options

Where does a person invest their retirement money?

One alternative option is called a Fixed Index Annuity.

Fixed Index Annuities are long-term investment programs offered through insurance companies where one can invest his money and guarantee the principal. Interest is then credited to the account based on the performance of a stock market index (such as the S&P 500). If the index goes up in a particular year, then the account is credited a portion of the gain up to a certain "cap" (a ceiling or limit). If the index goes down, then the account loses zero — nothing. The tradeoff is that you will give up some of the upside in exchange for no losses. This is certainly not a panacea, but it does have application in the appropriate circumstances.

There are other alternative options to the stock market. Be a wise investor and ask your financial planner what they are. See my article Alternatives to Investing in the Stock Market. Be armed with data and be able to intelligently pose questions to your Financial Planner about what is right for you.