DO: Focus on Time in the Market Had the fund investors focused on time in the market instead of timing the market, they could have realized the remarkable gains achieved by Lynch’s Magellan Fund. Waiting for the “right time to invest” can leave investors behind, which is why retirement plans like 401(k)s and individual retirement accounts (IRAs) can be attractive investment options. A diversified retirement plan, with recurring contributions over many years and numerous market cycles, has the benefit of dollar-cost averaging. Under a dollar-cost averaging scenario, an investor purchases Stock A for $10 per share, then the stock goes down to $5. The investor then purchases more Stock A, meaning the average cost per share is now $7.50. When Stock A returns to $7.50, the investor has now broken even, and when Stock A returns to the original $10 price per share, the investor has now earned gains. 401(k)s and IRAs often have a very handy built-in dollar-cost averaging tool called auto-rebalancing, which allocates gains into underperforming funds. When these underperforming funds come back, the investor has been accumulating shares at the lower prices. Auto-rebalancing is an example of a rules-based approach to investing, which takes emotion out of the equation and instead relies on a dollar-cost averaging strategy, helping investors compound their dollars over an extended period of time. As the great Albert Einstein once said, “Compound interest is the eighth wonder of the world.”
Here are a few other strategies for removing the human psychology, or emotions, out of the investment process.
DON’T: Let Short-Term Events Impact Long-Term Strategy Short-term market events, such as interest rate movement and stock market volatility, can certainly affect your psychology, but should not affect your long-term investment strategy. Don’t reallocate your portfolio based on the latest news. Don’t change your investment plan based on what you hear from the pundits on television or read about on the internet. Here is a rule of thumb: If you hear about it on the news, it has already happened, which means the market has already reacted. You will be late to the party. This is exactly why famed investor Warren Buffet prefers to have his office located far away from the hustle of Wall Street (in Omaha, Nebraska, to be exact!). DO: Review Your Long-Term Financial Goals Before making any snap decisions, revisit your investment strategy to ensure that you are on track to achieving your long-term financial goals. Have a plan in place, and stick to it, regardless of the ups and downs of the financial markets. Consider setting up auto-rebalancing to assist with the management of your portfolio.
If you would like to review your investment strategy or financial goals, please contact me at mlewis@wga.com or (949) 885-2379.
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