Media outlets are full of daily investing “advice” in the indistinguishable form of facts, opinions, and even advertisement of financial products.
Unfortunately, this “advice” often seems so convincing that investors feel the urge to take impulsive action. Often, these actions lead to costly investment mistakes.
Here are a few tips to help keep your investment plan on track:
Don’t Confuse Market Volatility with Risk
Risk is the potential of permanent loss, whereas volatility simply represents a change in value. Volatility is the short-term norm for the stock market — the rhythm of buying and selling, causing prices to adjust up or down in the short-term.
The key is to have a diversified portfolio with an appropriate level of risk to capture long-term growth.
Save ‘Big Bet’ Investing for the Casino
Holding concentrated stock positions or complicated investment vehicles in retirement funds is a bet that may or may not pay off. Few people can afford the consequences if it doesn’t — especially as they are quickly approaching retirement.
People have many reasons for trying to catch up in a hurry, but it is good to recall the old fable about the tortoise and the hare. A thoughtfully executed, long-term investment plan is one that will help achieve the goal of successfully finishing the race.
Understand the Fees You are Paying
Fees matter over time. Unfortunately, some forms of compensation (such as commissions) are not always transparent and do not always appear on investment statements.
Be clear on how much you are paying, and if the investment vehicle is overly complex, you might want to reconsider. People tend to overlook fees if they are not apparent or if there is some sort of “guarantee” involved.
Accept that Market Risk isn’t the Only Risk
Purchasing power and longevity risks are equally as important to the success of a long-term investment strategy as market risk. Having a professional help create a retirement plan that takes into account inflation and life expectancy allows you to determine how much market risk you need to comfortably take to reach your goals.
Buy Gold with Fun Money, Not Your Life Savings
Gold and similar commodities have historically been poor investments. Gold pays no income, unlike stocks and bonds, and it is impossible to value because the precious metal is unpredictably based on supply and demand — often driven by fear and not fundamentals.
Embrace a Global Approach to Reduce Portfolio Risk
Holding international stocks and bonds in your portfolio reduces your investment portfolio’s risk over time. Annual tables of investment returns illustrate the advantages of global diversification and the futility of market timing or having too much of a U.S. market bias.
Don’t Assume that Politics Drive the Markets
Many people are passionate about their political beliefs. While politics can have a short-term influence on the market, data shows that the market is resilient.
Historically it has returned to its fundamentals despite which party was in power. Making financial decisions based on politics is not a wise practice.
Don’t Expect Your Advisor to Get You Out During a Downturn
Investing in broad market index funds has increased in popularity in recent years as market timing and higher cost solutions have fallen out of favor. Unfortunately, despite overwhelming data and logic supporting the futility of successfully getting in and out of the market, investors struggle with their emotions when the markets roil.
One of the best things you can do is listen to your adviser before you lock in your losses by selling when the market is down. Consistently predicting the short-term movements of the markets is impossible, so it is better to follow your adviser’s advice and stay the course.