You’re ready to invest. You sit down at your computer with a stack of investment guides and mutual fund prospectus’s haphazardly laid out next to it and pull up your new brokerage account. You rub your hands together and prepare to buy that stock you’ve been watching for the last two weeks. You watched CNBC and got the analysts’ take on it and you think it’s the perfect stock to start off your portfolio.
But then, a strange thing happens.
As you move your mouse to execute a buy order, you suddenly recall a story about how your friend’s parents lost everything during the tech crash in the early 2000′s. You remember how panicked everyone at your company was in 2008 and how one of your co-workers had to delay retirement because he lost so much. You lose your nerve and quickly log out before you make what you think could be a fatal mistake.
The biggest peril you face in the stock market isn’t fraud or crashes or missed earnings reports. It’s fear.
For anyone who’s invested before, you know that the stock market is a lot like a roller coaster ride. When times get tough, that’s when discipline separates the long term investor from the short term trader. There’s an old adage on Wall Street: “No one ever made a dime by panicking.”
Believe it or not, everyone questions themselves when it comes to pulling the trigger on an investment, whether it’s a stock, bond, mutual fund, ETF, or anything else. The successful ones understand that managing risk is all about following the rules and maintaining a strategy without losing focus.
Diversification, diversification, diversification
Diversification is your best defense. I know you probably feel like talking about diversification again is like beating a dead horse, but I promise you if you take away nothing else, it’s the single greatest strategy you could have.
Mix it up.
Don’t put everything you own into one sector or even one mutual fund. Spread out your investment pool and lower your risk profile.
If you had a big tech portfolio in 2001, what do you think happened to your money? I bet if you ask anyone who went through that crash what they owned when they lost everything, it would’ve been mostly, if not entirely, made up of tech stocks. It might not be exciting to mix up what you own with things like consumer staples and utilities, but those are the very things that can keep a portfolio balanced out in hard times.
Schedule a routine check-up
Do yourself a favor and schedule a time at least once a year to go over your entire portfolio and see if anything needs to be adjusted.
Funds or stocks that haven’t performed for 12 months or so may warrant a swap into a different one. Even if everything has been performing as expected, those gains can throw off the balance of your portfolio.
If you’re trying to maintain a mix of 80 percent stocks and 20 percent bonds during a bull market, you’ll notice that the stocks will gain faster than bonds throwing off your allocation. If it’s off more than 10 percent, you’ll want to transfer funds to re-balance your portfolio.
If you’re committed to mastering investing on your own, this is an exercise you’ll learn to manage yourself. If you want help, there tools like Personal Capital can help you analyze your portfolio and see where changes need to be made. Jemstep is another investing app that provides tailored rebalancing recommendations for you, automatically.
Don’t try to time the market
At some point, you may begin to think you see trends in the market and attempt to skip the basics in order to time the market. (That is: in a short period of time, attempt to time buying or selling a stock with a dip or peak in the market.)
A piece of advice: don’t.
Statistics show that investors who try to time the market most often end up missing out on the best gains, leaving them far behind investors who bought…and held. Another study showed that if you missed the 90 best performing trading days of the market from 1963 to 2004, your average annual return would’ve dropped from 11 percent to 3 percent.
The best time to buy is whenever you’re ready.
You’re better off weathering the storm than trying to jump out and back in after you think it’s passed. By the time you get back in, you’ve probably missed out on some potential gains and hurt your long-term goals.
If you follow these rules: 1.) Diversify, 2.) Routinely rebalance and 3.) Don’t try to time the market, there’s no reason to be afraid of investing. Put your money to work for you and get back to earning more doing what you do best.