Buy low sell high.
That is the goal, yet most investors do the exact opposite.
It’s human nature.
Let’s take a look at some of the behaviors that influence our decisions. We are most influenced by pain points that are the most recent, most dramatic and most relevant. For those nearing retirement or saving for another long-term goal little has been more painful than the 2008 financial crisis.
When you ask most investors how the market faired in recent years most will respond that the market was down or flat. In reality the next three years following the 2008 pull back were positive, experiencing a gain. This indicates a big misconception about the market. Yet we are conditioned to follow the crowd. In investing we call this the heard mentality. If you look historically research supports that is exactly what we, as investors do. When the market, as measured by the S & P 500 index, performed well investors rushed in, buying high, and when the market pulled back we experienced a flight to safety, selling low.
This yo-yo effect causes investors to miss the best days in the market having lasting negative impact on long-term investment performance. Research will show that as disappointed as we are in the market the average investor has fared far worse.
The pain of loss has proven to outweigh the reward felt from a gain. The market correction we all experienced in 2008 left a lasting sting. The natural reaction is to shift to safety and take a more conservative stance. Yet today’s investors face a unique challenge. Traditional fixed-income investments are yielding next to nothing at current yields but long-term investment goals require capital growth. Investors have traded potential market losses for negative real returns when factoring in inflation. What to do?
Manage your own behavior
Shut out the headline noise; avoid media fatigue; focus on the bright spots. There are a lot of good things happening. I had a client, a small business owner; tell me this week that they have had a great year, the best year in quite a while. Now they are ready to jump-start their retirement savings.
Develop a Strategy
Understanding that human nature influences us to react emotionally yet evidence indicates that if we had just maintained our course we would have been ok. It may be time to take a second look at our investment strategy. Are you sitting on the sidelines looking in? Now may be a good time to look at a total return strategy factoring growth as well as income generating investments? It may be time to dollar cost back into the market, taking small steps.
Maintain your Focus
In keeping with the Olympic theme I couldn’t help but notice that discipline is the common thread that links all the various champions from sport to sport. Investing has the same thread. Success is a direct reflection of discipline. Keep your eye on the ball. The key to making dollar cost averaging work is discipline. Do it consistently.
Understand your tolerance for risk
If you are in then stay in, but don’t have more money at risk than you are comfortable losing. Understand your tolerance for risk and invest appropriately. This is where working with a good financial coach can be the difference maker. Together develop a sound, long-term plan for pursuing your financial goals. In fact some consider market declines as buying opportunities for long-term investors. With this approach when the market experiences volatility hopefully you will have the confidence to maintain your stance and let your plan work for you.
The real trick is staying calm when the market is in turmoil. It will go up and it will go down. That is the only thing we know with much certainty. You can’t influence how the economy, or the financial markets will react. What you can control is your commitment to a disciplined investment plan.
These investment strategies offer no guarantee that they will work in all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of uncertainty and volatility.