Instead of being taken for a trip, spend a little time planning for one

Deborah Leahy

July 2011

You may be looking forward to vacations, barbecues, and other events of the season. Your summer activities can actually provide you with some valuable lessons on managing your investment strategy.

Here are a few possibilities:

Plan your trip. If you’re taking a long road trip this summer, you’ll need to choose your vehicle, map out your route, determine how far you want to go each day and be certain of your destination. And, essentially, the same is true for your investment strategy. You need to choose the right investment vehicles, familiarize yourself with your ultimate goals (such as a comfortable retirement) and chart your progress along the way.

Try to avoid getting burned. If you’re going to spend a lot of time outdoors this summer, you may need to apply some sunscreen. But you don’t have to be exposed to the sun to get “burned”—it can happen in the investment world, too. However, you can help prevent this from happening by building a diversified portfolio. If most of your money is tied up in just one type of investment, and that asset class falls victim to a downturn, your portfolio could take big hit. But while some investments are moving down, others may be moving up, so it makes sense to spread your money among a range of vehicles appropriate for your risk tolerance, investment goals and time horizon.

Of course, diversification by itself cannot guarantee a profit or protect against loss, but it can help reduce the effects of volatility on your portfolio.

Keep yourself “hydrated.” When you’re outside on hot days, you can lose a lot of fluids, so you need to drink plenty of liquids. As an investor, you also need a reasonable amount of liquidity. In the severe market downturn of 2008 and early 2009, many investors found they had insufficient amounts of the type of liquid investments—cash and cash equivalents—that held up better than other, more aggressive vehicles. Furthermore, if you are relatively illiquid, you may have to dip into your longer-term investments to pay for short-term emergency needs. Try to always keep an adequate level of liquidity in your holdings.

Dress for the season. As you go about your summer activities, you won’t always wear the same clothes. On hot days, you might want to wear shorts, but on cool, rainy days, you might need heavier items or even a raincoat. And as you go through life, you may need to adjust your investment approach depending on your individual financial “season.”

For example, someone just starting her career might be able to afford to invest more aggressively, as she will have more opportunities to recover from the inevitable short-term downturns. As she closes in on retirement, though, she might need to take a more conservative approach so she can lower her investment risk. So there you have them—some ideas for “summertime investing.” Use them wisely, and they may be of value to you long after summer is over.

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Deborah Leahy is an investment adviser with Edward Jones, specializing in assisting seniors.