The market has had its trials of late. Some folks are saying it’s the worst of times, while others are revving up to purchase stocks that are currently low. What to do in these turbulent times?
We love to hear the ‘get rich quick’ stories of people who make it big in the stock market with the “buy low, sell high” strategy. And while this sometimes happens, most people who succeed with stocks employ a different strategy: staying the course.
How can we make this plan of action work? Let’s take a closer look.
Have a Plan
Investing in the stock market is not the same as gambling. It is using a specific tool as part of building a profitable investment portfolio. While stock investing has some known risks, there are ways to manage this based on some factors that are individual to you and your situation.
Stocks are a business tool, and you have to know how to use them effectively. People have made it their life’s work to learn and analyze the best way to invest in stocks, bonds, and other securities. No roulette wheel is involved!
Just like you have a plan for your retirement accounts (you do, don’t you?), you want to have a plan for your stock investments. Some things to consider include:
Your Current Finances. What is your financial situation? Think about the money you have left at the end of the month once your bills are paid, your contributions are made to retirement accounts, and necessities are purchased. This figure will tell you how much you have to invest.
Your Financial Goals. Are you investing as part of a long-term strategy for retirement, or is it to meet short-term gains for a specific purchase? This will determine what you want your investments to provide.
Your Age. It’s true: the younger you are, the riskier you can be in investing because you have more time to recoup any major losses. For those over 50, you don’t have the benefit of time, so less risky investments are safer.
Your Portfolio. We’ve all heard the adage of not putting all your eggs in one basket, and that goes for investing, too. A financial portfolio ought to contain a mix of bonds, mutual funds, real estate, stocks, and other investments.
There are other factors, of course, but the bottom line is having an investment plan and using that as your template that will guide your decisions and actions. Especially when the market takes a nosedive.
It’s easy enough to say, but sometimes hard to do: don’t panic. When the market drops, our advice is to stay the course. What does this mean exactly?
Staying the course is thought to be an old ship sailing term meaning to carry on in the bearing you were traveling regardless of obstacles. The navigation has been set. Now keep sailing in that direction. Many times, it is used in association with battles and wartime.
For investment, staying the course means sticking with the plan, your plan, while keeping the goal in mind. Panicky reactions and herd mentality (what’s everyone else doing?) can lead to irrational decision-making that in the end does not benefit you.
Some questions to ask yourself include:
● What’s changed?
● Does it require action?
● What’s the probability of another market fluctuation in the opposite direction?
● What is my end goal, and how does this affect it?
● How can I be reflective rather than reactive?
When you stay the course, you aren’t just waiting around, but you are remaining aware of what’s happening and thinking about the actions to take or not. Successful investor Warren Buffet discourages close monitoring of the market and instead advises not to worry too much. Buffet is a proponent of staying the course.
Timing Isn’t Everything
Timing isn’t everything, but time is. Sometimes people think the big and quick gains mantra is the only way to see profits in the investing world. But data shows it is the time in the market, not the timing, that bears the most fruit.
Bank of America studied data going back almost 100 years to investigate the impact of market fluctuations on returns. Best days in the market always appear after the market drops in every decade. The impact of panic selling: lower returns and missed opportunities.
By its very nature, panic selling is an overreaction to fears. “My accounts were doing so well and now they’ve dropped by X amount - I’m afraid I’ll be left with nothing!” These thoughts are filled with emotions and are rarely rational.
Experts know markets are cyclical and that some cycles are easier to predict than others. But even experts can’t always foresee everything that happens. So, for the amateur investor, it can be even murkier.
Trying to predict the bottom of the market or the “best time” to invest is also nearly impossible. As mentioned earlier, having a plan and staying the course doesn’t require a crystal ball into the future, just some fortitude and patience. Investment analyst Kenneth Fisher has said that time in the market is more important than timing the market.
With all that has transpired recently in the economy and stock market, it’s easy to think severe and immediate financial action is required. But instead of a knee-jerk reaction, stop and reflect on your goals, what the data shows, and your potential next steps. Sometimes when rebalancing your portfolio to reflect changes in the market, economy, and even your personal life makes sense, and we can help with that.