By Lyman Howard
Learn more about Lyman on NerdWallet’s Ask an Advisor
Is it any wonder that Americans have become reluctant to buy into the stock market? After the fiascoes of the 2000 internet bust and the 2008 crisis, it has been far more comfortable to remain in cash or bonds, since it hasn’t really “paid” not to be. Major stock indexes have only this year recovered to highs first reached over a decade ago, and it wasn’t exactly a smooth ride back, was it?
Today we hear accounts of stock exchange computer glitches, headline induced sell-offs, and political standoffs that can reduce even the most steadfast investors to being Nervous Nellies. Who wants to be the sucker at the poker table where professional traders with inside information and head starts on news releases are controlling the action?
What’s the solution, then? It is not to boycott the markets in favor of cash, unless you just cannot stand the anguish of uncertainty or will need to access that money within the next few years. With today’s depressed savings rates and long life expectancies it is just plain risky to earn nothing year upon year on long term savings. So to help make yourself a better and calmer market participant and investor, consider these five steps:
1. Reduce the price swings of your investment portfolio by mixing in stocks, bonds, and cash, and while you do this, spread out into many sectors, geographies, and company-sizes, too. This is to avoid being too concentrated on the fortunes of just one or a few enterprises.
2. Do not “trade” the market, looking for the right price to enter, and guessing at the right place to exit. Instead, stay invested in the broad market and periodically reset, or “rebalance”, the portfolio to your desired mix of stocks and bonds. This activity takes your emotional human frailties out of the investment equation, and forces you to sell part of the appreciated portions while buying more of the depressed portions. It is the best mechanism we have to foster “buying low” and “selling high”.
3. Refrain from watching television and internet financial news. Those channels gain viewership with controversy, emotion, and exclusively discussing quick rewards. The more casino-like the markets are, the better it is for them, but the worse it is for you! Turn off the tube, and only check your accounts when the quarterly statement arrives in the mail (hopefully email).
4. Do not utilize leverage. Borrowing to buy investments is what hedge funds use to amplify returns, and is what occasionally “blows them up”. Margin accounts are for speculation, and that isn’t investing.
5. Remember that you must save for the long term, and over the long term, those daily fluctuations become tiny little blips, ultimately insignificant. The longer your frame of reference, the less important any day’s minor tragedy or euphoria becomes.