How to Have a Positive Experience While Investing in the Stock Market
This month in our Investing Basics Series, we’re going to step away from how and what to invest in and instead discuss how to be an investor … without the ups and downs of the stock market causing sleepless nights.
You’ve read and heard the words “Successful investors are in the game for the long term”; this is truer than ever today. The past couple of years have been a tumultuous time in our country as well as in the world. It seems like it’s harder than ever to figure out what is true and what’s not; who to trust and who to not trust, what to prepare for and what to not worry about.
Today I’m going to share some tried and true tips to help you have a better investment experience. If followed, they will improve your investing experience, lessen the stress in your life, and give you more peace of mind.
The 10 Steps Successful Investors Live By
1. Embrace Market Pricing
The market is an effective information-processing machine because each day it handles billions of dollars in trades between buyers and sellers. The market updates in real time; with each trade buyers and sellers are bringing new information to the market, helping set prices. With every trade, stock prices adjust accordingly.
Even if you don’t believe the price is always right, you can comfortably accept the market price at any given moment is the best estimate of actual value at that time.
2. Don’t Try to Outguess the Market
The market is so effective that it’s pricing power works against investors who try to outperform the market. As we learned in June’s Post, Mutual Funds and ETFs: What Are They and Which is the Better Investment For You, the number of fund managers who successfully outperform the stock market are very few. Not to mention, those same active fund managers charge much higher fees than low cost passive funds. Oftentimes, if the active fund manager outperforms the market, the amount you will pay in fees isn’t worth the gains you made.
The truth is, no one can accurately and consistently predict the market. Once this is accepted, it can be used to your advantage.
3. Let Markets Work For You
The markets reward long term investors. Historically, the equity and bond markets have provided growth of wealth that has more than offset inflation, including all of the downturns and sometimes rollercoaster rides. In fact, following some of the worst years in market history, that same market rebounded with a vengeance and reaped huge returns.
It takes discipline; but the reason you invested was to make money. Assuming your goal is to accrue wealth, keeping your money in the market for the long term is the surest way to do it.
4. Avoid Market Timing
Don’t try to time the market. The market does move in cycles and there are various indicators that potentially reflect the phase the market is in at any given time. However, this does not mean that someone can time when to buy and/or sell specific investments accurately and consistently over time. Even if you know what phase the market is in, you never know which market segment will outperform others from year to year.
Even investors who have been relatively successful in “timing the market” don’t outperform investors who buy and hold their securities for the long term.
By holding a diversified portfolio, investors are well positioned to get positive returns wherever and wherever they occur.
5. Practice Smart Diversification
You know the old saying “Don’t put all of your eggs in one basket”? This most definitely applies when investing in the stock market. By investing in different segments of the market, along with investing in companies around the globe, you maximize returns and minimize overall risk. For a refresher on Stocks and Bonds our May blog might be helpful.
Diversification is one of the most important components of reaching your long term financial goals. While diversification won’t guarantee against loss, it does help balance out your portfolio if a particular segment of the market is having a rough patch or has been hit with a crisis management scenario.
6. Resist Chasing Past Performance
Again, the stock market is unpredictable. Just because something did well in the past does not guarantee that it will continue to do well in the future.
Statistically, past performance gives little insight into a fund’s future returns. Most funds in the top quartile (25%) of the previous 5 year returns did not maintain a top 25% ranking in the following five years.
7. Consider the Drivers of Returns
Instead of looking at past performance to try to gauge how a security is going to do in the future, remember that expected returns depend on current market prices and expected future cash flows.
Other drivers of return In the equities market include:
- Company size
- Relative price of the stock
- Profitability of the stock
And other drivers of return in the fixed income market include:
- Term length of the bond
- Credit quality of the issuer
- Currency of issuance
It’s always important to do your research before you invest. Always know what you own and why. The most profitable portfolios are balanced when it comes to the diversity of investments. If you must sell, this knowledge helps determine which investments to hold onto during times when the market takes a downturn.
8. Manage Your Emotions
Another key thing to hold onto during times of struggle is to separate your emotions from your investments. Do your utmost to keep an objective and rational decision making perspective at all times.
This is much easier said than done but stepping back and coolly analyzing the situation helps avoid rash decisions that have a negative impact on your financial health.
The market is going to rise and fall. In both long and short term historical context, the market has proven to be effective and has created wealth growth that has consistently outpaced inflation.
9. Tune Out the Noise
It makes it easier to separate your emotions from your investments if you turn out the noise. Daily market news and commentary can make even the most disciplined investor sweat a little. Some messages stir anxiety about the future and might tempt you to chase the latest investment trend. With the 24 hour news cycle and the constant notifications we get on our phones, it really is hard to tune out the noise.
Start by considering your various sources of news. Rely on designated and proven financial news sources vs. words spoken by your favorite news commentator.
This helps you to remain objective and to remember the market has outpaced inflation for the past 100 years and every major downturn in the market has been followed by a major upswing which more than compensated for any losses incurred.
10. Focus On What You Can Control
Rather than reacting to the noise, focus on aspects of your investment actions you can control. You can (and should) control what securities you invest in, your budget, and your financial plan.
Investing can be great during the good times and really challenging during the not so good times. But if you stick with the long term perspective, do your best to separate your emotions from your investments, and know what you have invested in and why, the market will serve you well.
Our role as your personal Fiduciary Fee-Only Financial Advisor is three-fold:
Our process is one of developing a comprehensive evaluation of your current and future financial state by using known variables to predict future cash flow, asset value, potential diversification and withdrawal plans.
Every client’s needs and time tables are different and, as such, each client benefits from having a long term flexible plan coupled with an understanding of how and why they might react to market changes.
Behavioral Planning is the combination of behavioral and cognitive psychological theory with conventional economics and finance. The intent of behavioral planning is to educate clients in how to avoid irrational and detrimental financial actions.
Investment and Wealth Management
The determination of what investment vehicles are most beneficial to meet your future goals and priorities in accordance with relevant timeline prerequisites.
These three aspects work as one entity to build wealth via a diversified portfolio, properly managed expenses, turnover, and taxes, and risk avoidance as you remain disciplined through the market dips and swings.
Schedule a Get Acquainted Meeting today. We would love to hear from you!