By Jonathan DeYoe AIF®, CPWA
Learn more about Jonathan on NerdWallet’s Ask an Advisor
No one ever knows what is happening next. There are too many variables and too many opportunities to make mistakes not to make a few yourself.
Today’s headlines—every day’s headlines, really—are filled with reasons not to invest. ISIS, Putin-Russia-Ukraine, slow economic growth, weak employment numbers, China’s hard landing, European stagnation, “bubble” talk, fear of the next Fed decision—we can always find reasons not to invest. Today, because of the constant anxiety over things going wrong, is a hard day to invest.
But the illusion is that this is somehow different from “ordinary” times. As if there were some benchmark period of time that we point to as the “ideal” time to invest, when everything was smooth and there were no economic, political or market crises happening. As if, even if this were to happen, it could possibly be a persistent period in human history.
This time is not different in any appreciable way from the last time, or the time before that. (Of course, plenty of folks out there suggest that it is different, but don’t believe them—or believe them at your own peril.)
If it is so hard to invest, given the headlines of the day, how might we get over this hump? What will make us feel better about “risking” our capital in investments during periods when we see risk everywhere around us? How can we better think about investing?
The answer: By thinking of it as a continuous process over decades and throughout lifetimes. Today is an incredibly hard day to invest. But every day is a good day to invest if:
- You are dollar cost averaging month in and month out
- You have a patient plan of accumulation with a broadly diversified portfolio
- You occasionally (on a calendar; not on an emotional basis) rebalance your portfolio
- You are able to respond to market actions with emotional intelligence instead of fear or greed
Over time, the practices of dollar cost averaging, broad diversification and rebalancing always work. Dollar cost averaging means that when values are high you buy less, and when values are low you buy more, just by investing the same amount. The key is to just keep buying throughout the market cycle.
Broad diversification means that at any point in time, there will be some things in your portfolio that do well and others that do not, and those things will trade places. You are making a conscious tradeoff: You are agreeing to never make a killing in return for never getting killed. It is slow and steady.
Rebalancing, as a calendar-based practice and not an emotional one, forces you to buy the thing in your portfolio that has gone down the most or up the least and sell the thing in your portfolio that has gone up the most or down the least. It forces you to buy the very things you think belong in your portfolio when they are at a relatively low price and sell them when they are at a relatively high price. You don’t have to think about whether today or next week would be a better moment to rebalance; you just have to make it a regular occurrence.
Emotional intelligence comes from the study of financial history. Corrections, recessions and bear markets happen as part of the natural business cycle. Markets move up most of the time, but occasionally come down in hard and painful ways—then they move up again. This up-and-down process is in no way predictable; we cannot reliably “trade” it.
However, even though we do not know why, how or when the market may turn, we can rest assured that it will. The key is not to get either excited or scared out of our well-considered, broadly diversified, occasionally rebalanced portfolio.
With these practices in place, every day is a great day to invest, and you don’t much have to worry about the headlines of this or any particular day.
Jonathan K. DeYoe, AIF and CPWA, is the founder and president of DeYoe Wealth Management in Berkeley, California, and blogs at The Happiness Dividend Blog. Financial Planning and Investment Advisory Services offered through DeYoe Wealth Management, Inc., a Registered Investment Advisor. Securities offered through LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations to any individual. For your individual planning and investing needs, please see your investment professional.