Taking the Emotions out of Investing
Investors often want to sell to protect their money when the stock market’s decline, as we have seen this year. But how many investors know when the best time is to sell and then later to buy again. If history has proven one thing, it’s that you can’t time the markets, so why even try. Investors often hold on until they can’t take it anymore and then sell. Most times that is close to the bottom of a market selloff. Feeling like they missed the upside when the market rebounds, they usually jump back in. This is the classic definition of buying high and selling low, a strategy that almost always guarantees you fall short of reaching your financial goals. So how do we avoid this?
Actually, it’s easier than you think.
- Plan accordingly: Know your goals so you can figure out how to plan appropriately. This is similar to planning a trip. Know where you are starting, where you want to go, and the stops along the way. If you plan to retire, look at the stops to get there. Buying a house, funding college, maybe a new car. Once you have your “road map,” you can see what you need to do to get there.
- Time frames: When do you plan to retire, or need funds for a new car, etc.? Short-term goals need money more readily available with lower risk. With longer-term goals, you can afford to take needed risks. It may be uncomfortable sometimes, but keep your eye on the future, not the past.
- Portfolio allocation: This is the key to successful investing. Once you settle in with an allocation, stick to it. Let’s say you want a 60/40 allocation (60% equities/40% fixed income). Reallocate when the percentages change. If the stock market does well, your allocation may be at 65/35. So sell into the upside and buy the underweighted asset class. If the stock market has sold off, maybe you are at 55/45. Then you should add to equities to return to your desired allocation. This forces you to sell high and buy low, a winning strategy.
- Close off the noise: When the markets fall, every article and newscast seems to mention how bad things are and how bad they will get. Stop watching the news and stop reading the articles. Frankly, the pundits don’t know what will happen next. It was March 2009, towards the end of the Great Recession, and everyone was talking about how much lower the markets would go. That was the beginning of one of the best bull markets in history!
If you plan accordingly, don’t panic and act rationally, you can survive bear markets, no matter how painful they may be.