Investing always involves some degree of uncertainty: markets can be volatile, and the economic conditions which underlie market performance can be difficult to predict. Because of this, incorporating time-tested investing principles that can help you steer a steady course through market vicissitudes is essential to designing a successful investment strategy. The tips listed below offer insights that can help you in making a variety of investment decisions.
Focus on what matters: Investors who obsess over the latest trendy stock can get distracted and lose track of the factors that matter most in the long run: sticking to a savings and investment plan even in the face of market ups and downs. Chasing the latest hot stock can lead to disappointing results that can negatively affect your long-term performance. Investment publications and business television shows constantly cover the latest trends and hot stocks, which can make it difficult to maintain your investment discipline. While the most recent quote for the price of oil or the Dow Jones Industrial Average may be of interest to daytraders or professional investors, for long-term investors they are not all that important. Stay focused on reaching your long-term investment objectives and block out the day-to-day noise.
Manage your expectations: While the stock market or specific sectors of the market may provide stellar returns in any one year, be careful not to project short-term returns too far into the future. Stock market returns are cyclical, meaning that long-term investors should be prepared to encounter bear markets as well as bull markets over the course of a full investment cycle. Don’t expect that outstanding returns in any one year will necessarily reflect your average returns over the long haul.
Diversify: An investment error closely linked to chasing the latest hot stock or mutual fund is failing to properly diversify your investments. An example of the danger of such an approach is the so-called “tech wreck” of 2000, when technology stocks fell dramatically after having been top performers for years. Investors who, lured by the past performance of the sector, allocated an excessive portion of their portfolio to tech stocks experienced significant losses that might have been avoided if they had diversified.
Don’t hesitate to take profits: An old Wall Street saw goes as follows: bulls make money and bears make money, but hogs get slaughtered. If some of your investments show significant profits, it may be time to harvest some of them. Even if you still believe in the potential of a company, market fluctuations or unexpected developments can rapidly reduce your gains partially or completely. One way to lessen the risk of losing all your gains in a stock is to sell a portion of a stock that has appreciated significantly, thus locking in at least some of your profits.
Be flexible: While sticking to your long-term plan is crucial for achieving your investment objectives, this doesn’t mean that you shouldn’t be ready to make tactical changes in the plan when necessary. For instance, if a certain sector seems likely to underperform the market, underweighting it in your portfolio may be warranted. Similarly, changing your asset allocation to take advantage of an undervalued sector or stock, within the context of a diversified portfolio, can also be a good move.
Invest like an owner: When selecting individual stocks, imagine that you will be the one running the company. Just as you wouldn’t buy a business unless you thought you could make a profit operating it, be wary of purchasing a stock if you don’t believe the company is likely to be profitable within a reasonable amount of time. While “story” stocks that captivate the public imagination may soar in value for a time, they are likely to fall to earth eventually unless they make money at some point.
Schedule Your Free Financial Planning Session with Our Award Winning CFP
Samuel Rad is an award winning fee-based Financial Planner with Affluencer Financial Advisors in Los Angeles, California. Mr. Rad has multiple licenses in the investments, real estate and insurance fields. He has spent a considerable amount of his career lecturing at universities and companies, on financial topics such as financial planning, retirement planning, and estate planning.
He currently lectures at UCLA and West Los Angeles College.