Jan. 23, 2019
Normally, I tell clients to expect at least one 10% drop in the stock market each and every year. We recently went through one of those dips at the end of 2018. Like anything, you have to take the good with the bad. A sudden decline in the market can be a breeding ground for investor mistakes that can cause big problems for your financial plan in the long run. The stock market has become increasingly volatile lately, which can lead to some bad investor behaviors.
There are two main parts to investing: Investment Returns and Investor Behavior. You can only control one of the two. Your behavior.
Here are a few investing fundamentals I’d like to share with you. Some are so simple they are often overlooked and ignored.
Jump for Joy when you become a better investor following these 11 investing tips.
1.) You don’t receive bonus points for making things overly complicated. I had a client with about 50 accounts all over the place. Every time he had extra money, he opened a new account. The problem was that he bought basically the same thing in each account. On that note, a well-managed and diversified portfolio can be simple and easy to maintain. He thought he was diversified, but he was just making his life difficult.
2.) Your portfolio doesn’t care if you look at it every day. I have another client who checks his portfolio on his iPhone multiple times each day. This is a waste of time. The only real benefit (if you can call it that) is the occasional spike in your blood pressure, which may reduce your life expectancy and result in less money needed to fund your long-term retirement plan. The market going up and down is a normal thing and should be expected.
3.) Change your portfolio when your personal facts change. Generally, big changes to an investment strategy should be made when your life situation has changed. Perhaps you’ve reached the home stretch for retirement or the extra money from your home down payment is being re-positioned for new financial goals. Avoid making drastic changes to your portfolio based on some big story you heard on the evening news or a hot stock tip you heard at a cocktail party. There is no reason you need to reallocate your portfolio over and over again with no rhyme or reason.
You don’t have all the answers now to become great at investing.
4.) “It depends” and “I don’t know” are the answer to many financial questions. I often get asked, “Should I do A or B?” It depends. I can give you the best answer with a little more information. On the other hand, I don’t know any prominent psychic financial planners. (I’ll admit I haven’t looked.) While the stock market has traditionally trended upwards, I don’t know what the stock market will do today, or for that matter, how it will perform in the next month. I don’t know and really no one else does either. But what I do know is how to help you build a plan that will help you reach your financial goals. That is probably a lot more relevant to you than how many points the stock market moved today.
5.) The market goes up, the market goes down, and we will have recessions on a fairly regular basis. Every year winter comes, the temperature drops, and then things eventually warm up again. Just like the temperature, the market will fluctuate. If your investments move more than you can stomach, consider a more moderate portfolio. But, don’t ditch the market altogether.
6.) Markets reward patience more than any other skill. I’ll admit it. I often felt like the sky was falling during the crash of 2008 and 2009. Many people who bailed out of the market haven’t come back all these years later. The hearty few who were patient, and continued to buy during the downturn, got some great rewards from the market. Did I mention the market has nearly tripled in value since the depths of the great recession?
7.) Luck and skill are not the same things. Have you heard the phrase “even a broken clock is right twice per day”? When the market has a great run like the past few years, it’s easy to think investing is easy or that you are extremely skilled at it. I’ve found that the bigger the ego, the bigger the crash when the market eventually does correct.
8.) A well-diversified portfolio WILL have parts that look like crap sometimes. If everything looks great on every statement, your portfolio is probably not diversified enough. Different parts of the world and different segments of the economy do well at different times. You want to be buying low and selling high. People often gravitate to what did great last year.
What worked years ago, may not make you look great today. (Photo by Paul Harris/Getty Images ) Images
9.) Think like a Fashionista. The hottest style or trend last year will probably look dated or out of style this year. Be smart with your money. Think of a diversified portfolio like those classic pieces you can keep in your wardrobe year after year.
10.) Short-term thinking is the enemy of your investments. Think long term. I got a call from an investor last year who was upset because a piece of his financial plan had dropped three percent in the third quarter. I don’t like when accounts go down either but they were up way more than expected in this portfolio over the past 5 years. Let’s just say overall, this overall portfolio had been killing it. It came back and did well in the fourth quarter as well. Had the investor thought short term, he would have missed the growth during the fourth quarter by selling when the fund dipped.
11.) Investor behavior is HUGE. Trying to pick the best investment is great, but the biggest key to your success is to behave well as an investor. It’s not about being a math genius or having hot stock tips. It’s quite the opposite. Keep it simple and stick with a long-term investment plan. Resist the idiocy of the masses, and buy low, sell high. Put away some money every month, or from every paycheck and watch your account balances grow over time. Put it on autopilot and forget it.
No investor can control the overall stock market, but you can be smart at how you handle your investments. Invest for the long term. Don’t be a short-term speculator (gambler). If you are having trouble with any of the 11 aforementioned issues, consider working with a certified financial planner to help get your financial house in order, and most importantly, keep it that way.