With everything going on in the world, from skyrocketing gas and grocery prices to war to the pandemic to politics, I thought it would be good to look at the core principles and practices that help us invest smarter.
To invest smarter, you need to be a less emotional investor. You all know that I focus quite a bit on my role as a behavioral coach for my clients which helps them make smarter and less emotional decisions about their financial plans and investment portfolios. As an advisor who focuses on behavioral finance, I hone in on both the psychological aspects and mechanics of investing.
I’m sure, by now, you can all recite some of my basic advice on emotional investing, but I’ll do a quick review here. First, establish long-term financial goals and specific timeframes, dollar amounts, and action steps to support those goals. Second, tune out the noise. Remember that the media is forced to be sensational to keep its audience engaged and viewership up. When the media shouts disaster at us all day long instinctually, we want to run, find the nearest rock, and crawl right under it with our coffee can of money. Except, that is the worst thing we can do for several reasons.
Let me ask you this, what are downturns in the market typically followed by? Up turns. What happens when you step out of the market during a downturn and then hawk the market waiting for the right time to get back in? Well, you inevitably get left out of the upturn.
This is the danger of missed opportunities, and it’s a big one because historically, investors who removed their money from the market during downturns and volatility earned less than those who kept their long-term approach intact and did not sell. We call opportunity cost, which basically means “What should have I done with my money?” Let’s look at one of my favorite examples to put things in perspective - say you invested $1 in the S&P 500 with all dividends reinvested on January 1, 1926. By December 31, 2020, that dollar would have grown to $10,896.1 Nope. I am not making this up, I promise! Say you took that same dollar, put it in cash, and left it there, just waiting for that right time to invest it. Well, your dollar would lose value at about 2% per year. Not too good!1
So, how do you avoid missed opportunities? We talked about staying in for the long term and tuning out the noise, but there are three specific principles and practices that can help you stay the course no matter what the market and economy throw at us. This month we will talk about the principles of faith, patience, and discipline and the practices of asset allocation, diversification, and rebalancing. I believe these are the tried and true principles and practices that position investors for better outcomes.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit, please share.