Smoother Sailing

Fear is an emotion. It is not an investment strategy. As you work to master that Buddha-like mantra, let’s take a look at five traps that might trip you up as we navigate some choppy seas in the market these days. If nothing else you might sleep better after you read this blog post…

1. Fear…

A bad day, week, or even a bad year in the market, is not going to have a tremendous impact on a long-term plan. Don’t let fear trick you into becoming a short-term investor when you have a long-term plan. If you are saving for retirement with an investment horizon of 10, 20, or 30 years or more, dips along the way work to your advantage as you scoop up more shares during periods of volatility. A long term portfolio is built to handle rough seas, so let it ride…

A better idea: Warren Buffett says “be greedy when others are fearful.” A long term investor should see market dips as an opportunity to scoop up shares when they are “on sale”. Short term dips are buying opportunities for the long term. When I see the market dip 10% ore more I’m digging in the couch cushions trying to find as much money as I can to buy shares.

2. Pain…

More and more often we are hearing newscasters screaming about an 800-point drop in the Dow, or lamenting the fact that the Dow was down 1,000 points this week. In the grand scheme of things these are minor moves in terms of long term market value. However, if you let fear drive your investing strategy these swings can be daunting. Why? When news of a market dip causes you pain, your natural human reaction is going to be eliminating the pain point – and that means selling your stocks until the stormy seas calm down a bit. This is NOT a good strategy.

A better idea: Don’t let the daily news cycle drive your saving & investing plan. Stick to your long range plan instead. This should not involve trading based on day to day events. News guy wants you to be scared so you’ll watch him more often. He is not a remedy for your pain…

3. Risk…

Many times investors mis-judge their tolerance for risk by investing in the wrong asset for their time horizon. Stocks are the best investment for a long horizon (5 years or more), but not a good choice for someone saving money for short term needs. Why? Because of risk. Money saved for short-term needs (5 years or less) should be in cash. To protect against market swings that may happen within your time horizon buy a money-market fund or a CD to ensure smooth sailing toward short term goals.

A better idea: It’s ok to act speculatively and take some big risks in hopes of big gains. Do so with no more than 10% of your total portfolio and do it with money you will need not need in the near future. You want to have the advantage of time to see your risk become reward instead of being forced to bail out at a low point because you have to have that cash.

4. Strategy…

Those who sell when the market starts dipping see two things happen. They ultimately sell for the wrong price (too low) and they miss the market’s eventual upswing while they sit on the sidelines in fear. As a result, they’ll buy back in at the wrong price (too high) after waiting until the market returns to a comfortable level. Selling into a down market is the most costly mistake you can make, yet I see it happen all the time. It is the most common strategy for those with no strategy at all. There is simply no strategic way to time the market and predict its storms and waves with any accuracy. No, you don’t have this forecasting strategy figured out and neither does your friend, co-worker, hairdresser, banker, or rich uncle.

A better idea: Dollar Cost Averaging is the best way to “time” the market. Auto-draft from your checking account and buy a set amount every month, no matter what. You’ll buy more shares as the market dips and fewer shares when the market peaks.

5. Discipline…

Failure to remain disciplined in your investments can lead to your allocation getting out of whack. You’ll want to check at least once per year to make sure you are properly allocated in the market sectors you want to target. For example, my current allocation is 80% stocks and 20% bonds. As stocks have caught fire over the past decade I have been selling some high-flying stocks to buy lower priced bonds. Yes, it tempting to let the winners ride in hopes of bigger gains. On the other hand, a disciplined approach to an allocation strategy allows me to sleep at night, no matter what the seas throw my way. This takes emotion out of the equation.

A better idea: Asset allocation is far more responsible for your gains over time than your asset selection. Set an allocation that fits your risk tolerance and timeline and then re-visit it on a regular basis. Your grandma would say “don’t put all your eggs ion one basket”. When you allocate broadly you’ll be in some sectors that raise as other sectors fall.

A 100-year look at long-term investing in the DOW. Can you spot the obvious trend?

Conclusion:

Failure to plan means planning to fail – or at least that’s what my junior high gym coach used to scream all the time. It does, however, ring true when it comes to investing. A solid plan will also help you navigate periods of choppy waters created by things like market corrections, interest rate increases, Chinese real estate crashes, accounting scandals, housing market bubbles, tech bubbles, Brexit, Russian bond defaults, terrorist attacks, wars, and presidential elections. Do any of these sound familiar? Develop a plan where you will easily sail straight through these choppy stock market waves and on to smoother seas…

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