Investing is Simple
Investing is deceptively simple, but it sure isn’t easy.
Recently, we finished teaching “Gearing Up for the Next Market Crash. It’s part of this year’s series of our wealth mastery and investor education classes to help people at every stage of life invest smarter. We always aim to give our students nuggets of wisdom gleaned from academic research, instead of the wolves of Wall Street so they know what to do when they encounter the next hot investing tip and media frenzy fed to us all day, every day.
Successful investing is more about your mind than anything else. Even though many investors know what they should do, when the markets fall, they shift into panic mode and begin selling. So, why is staying the course when all hell breaks loose in the markets so important?
As our class sat wondering how they could be sure they were investing the right way, I asked myself, “How can I help the people who are counting on us understand this counter-intuitive concept?
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Here’s what you should know . . .
When investors stick to an investment plan carefully designed for them, most will work over the long term.
But the biggest problem is that people don’t. They buy high and sell low, and it’s one of the biggest mistakes investors make. What prompts investors to do this? Well, it’s based on fear that they won’t have enough money.
Often relying too much on what happens day-to-day, we hope someone can help predict what will happen in the future markets. We gravitate toward perspectives that closely align with our own beliefs, or what we’ve been taught all of our life. At the prognosticator’s urging, people sell winning investments and replace them with losing investments in the hopes of short-term gain is like gambling. People want what’s familiar and many times when we do a financial analysis, we find that they’ve completely ignored diversification in their portfolios.
So, How Do We End Our Self-Sabotaging Madness?
Warren Buffett once said, “There seems to be some perverse human characteristic that likes to make easy things difficult.”
How do we combat our inclination to self-sabotage our investment portfolios and well-laid financial plans?
The first strategy is becoming aware. Thinking about your financial plan and WHY you believe you should sell those stocks after reading today’s news is also a start. Making important investment decisions based on these short-term circumstances is one of the most dangerous moves any investor can make.
Remember, YOU are your own worst enemy.
While it’s harder to control your behavior, costs are one arena you can control.
Morningstar determined that fees are an important aspect of investment performance. Avoiding high costs and slick financial salespeople posing as real investment advisors will also do a lot for your returns. Becoming aware of costs coupled with care in reducing taxes and eliminating frequent trading fees also increases your chances for success.
In a down market, proper diversification won’t stop you from losing money; but it can help you lose LESS. Since no one can predict the future, investing your money among a globally-diversified portfolio is a sensible strategy.
However, to fully realize the potential of diversification in your portfolio, you’ll also want to employ dollar-cost averaging (regularly investing a set amount of money) and periodically re-balancing.
This simple strategy isn’t easy. Sadly, the pull of our emotions, savvy financial salespeople who seem to have all the answers so they can watch commissions slip from your wallet to theirs, and inaction keep many people from achieving their financial dreams. But you don’t have to be one of them.
I hope all of my students remember this the next time they hear about a hot investing tip and think about doing something unwise with their hard-earned money.
Remember, keep it simple, stick to your plan when the markets are restless, diversify globally, consider costs, don’t try to time the market, and above all else … ignore the media gurus!
It’s harder than you think to keep your investing simple. But it doesn’t have to be. You’ll gain an investing edge when you attend Mind Over Money – because when you know what your investments are doing and WHY, you’ll make the right choice.
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About Greg Hammond, CFP®, CPA
Greg Hammond is the chief executive officer of Hammond Iles Wealth Advisors, and co-founder of Planned Giving Strategies®. Greg leads a team of professional financial advisors providing customized wealth management and investment solutions for high-net-worth individuals, families, companies, and charitable organizations across the U.S.