You know the type: parents who hover over absolutely everything their children do. A human resources professional once told me about a helicopter mom who actually thought she should be there at her 24 year old’s interview to “help him answer the questions.” No, he didn’t get the job.
The problem is that as an investor, we can tend to treat our investment capital like our children and hover and watch absolutely everything they do. That is a recipe for disaster, sleepless nights, and diminished returns. Our typical response: “But that’s my baby!” And when our baby has been hurt by the recent downturn and by market volatility, we scurry back to our favorite finance site and check the latest hour’s numbers.
If that’s the case, you and I need to alter our perspective.
Remember that investing is a long term process
Let’s focus on our long term investment goals. Retirement primarily, but it could also include any goal with a 10+ year time horizon such as college expenses for your children. When you stop worrying about the short term ups and downs and accept that the market WILL swing up and down (sometimes wildly), those crazy daily fluctuations get minimized in your mind. What also helps is to stop checking the status of our investments so often. Start checking once every month … or two.
Diversify your investment portfolio
Putting all your eggs in one basket IS a fabulous idea as long as you can watch and control the basket. For the average investor with less than one billion in net worth, it isn’t feasible. What is much more feasible is to invest in a portfolio that’s spread across different asset groupings. I’ve mentioned it many times on this blog, but one of the BEST investment books for the average person is Allen Roth’s How A Second Grader Beats Wall Street. Investing broad based mutual funds or exchange traded fund indexed to the broader market can help you reduce the risk associated with putting all of your eggs in one basket.
Regular investing allows you to buy more shares when the price is low and fewer shares when the price is high. If it’s available to you, put your investing on auto-pilot and make regular purchases of your investment products. This process of regular investing, when used regardless of swinging price levels, is called dollar-cost averaging.
Dollar-cost averaging can reduce your average cost of fund shares over a long period of time. Though it won’t guarantee a profit or protect you from a loss, it will average out the cost of fund shares as the market swings when you’re investing for the long-term.
When you rebalance your investment portfolio, you sell some of your winners and buy more of your losers. Sounds counterintuitive doesn’t it? The reason it works is that you take profits when they’re available and you buy more shares when they go “on sale.” Let’s face it: the market isn’t nearly as “efficient” as many people would have you believe. If it were truly efficient, bubbles wouldn’t exist and you wouldn’t see wild swings in a stock’s price even though no news broke. The market is efficient over the long term, but for anything less than one or two years, the market can go nuts.
While no one can accurately predict the market (or anything for that matter), we can shift our focus to our long term investment goals and make sure we’re putting strategies in place to help us achieve them.