A commonly known investing philosophy is to buy low and sell high. When it comes to the stock market, however, many investors do exactly the opposite. Why do they make this common mistake? The tendency for many people is to want to get in on stocks when they are rising and cash out on them when they are falling. The psychological factor behind this is the investors’ fear of missing out on a good thing. They would rather buy stocks at a more expensive price than risk missing the perceived gains that could be coming. Then when the stock market declines, they pull their money out thinking that they would lose even more if left in there. The obvious problem with this strategy is that the investor is buying high and selling low. They are losing more money then they are gaining in each transaction. They are making investment choices with their emotions instead of logic. Unfortunately, this mistake is all too common. To avoid this mistake, put these 5 investing strategies into practice.
1. Buy for the long haul. Warren Buffet says, “If you aren’t willing to commit to a stock for 10 years, don’t even commit to it for 10 minutes.” The key to building wealth is to invest for the long-term. The market will have its ups and downs, but historically it has had an annualized rate of return of about 10%. At this rate you can expect to double your money about every 7 years. The key is to keep your money in the stock market even when the sky is falling. Remind yourself that the market will bounce back, just like it did after the Great Recession of ’08. When you invest for the long-term, you can expect more stable returns.
2. Set it and forget it. Once you’ve set your portfolio up it’s a good idea to rebalance every year or so, but don’t get into day-trading or adjusting your portfolio weekly. This will only set you up for failure. It’s a good idea to look at monthly statements but checking them daily can lead to hysteria.
3. Instead of pulling money out in a stock market dip, buy more stocks. The best time to buy stocks is when they are less expensive which happens during a bear market. Instead of pulling your money out like most people, buy more during these times. This can increase your returns tremendously!
4. Invest according to your risk tolerance. Someone who is young and has plenty of time for their investments to bounce back can invest more aggressively than someone who is just months or a few years away from retirement. The key is to invest according to your risk tolerance so that you don’t lose a large portion of your money at a time you really can’t afford to.
5. Practice dollar-cost averaging. Dollar-cost averaging is the practice of investing regularly, generally monthly, in your investments. This can be more beneficial than just investing a lump sum because it averages out the cost of your investments over time and in up and down markets. This averaging of your cost helps you to grow your investments.