It’s easy to view the stories of market speculation that have dominated the news recently as cautionary tales for individual investors. But we can also look at the current moment as an opportunity to welcome a new group of investors to the market: those who have been drawn in by all the high-stakes action, yet want an investment approach that doesn’t keep them up at night.
Some market enthusiasts may tell you otherwise, but you don’t have to find the next big stock to win in the stock market. Concentrating your entire investment on one or two companies can mean exposing yourself to unnecessary risk. Even if you manage to land a few big winners, good luck is unlikely to repeat throughout a lifetime of investing.
One of the distinctions between long-term investing and short-term trading, or day trading, is the latter often involves trying to time short-term market moves. Just as with gambling, sometimes people hit it big, but there’s also a good chance they lose. For every individual who got into and out of a hot stock at the right time, there’s another who bought or sold at the wrong time. If you treat the market like a casino, not only do you have to pick the right stock, but also the right moment.
Losing money is not the only pitfall when it comes to trying to pick winners in the stock market. Let’s not forget the other effect of building an investment strategy on emotion and impulse: a frantic, anxious state of mind. The benefits of being a long-term investor are not only financial, but also psychological. To cultivate a calmer, more deliberate perspective, lean on the whole market rather than on individual stocks through a low-cost, highly diversified portfolio. Then let time and the power of compounding do their work. Compounding can be the investor’s best friend: at an annual rate of about 10% — which has been the historical rate of return on U.S. equities — a dollar invested in the market doubles every seven years.
Index funds can be a good solution for many people. I was involved in the creation of one of the first index funds early in my career, and I’ve enjoyed watching the positive impact indexing has had on the industry and investors. For those who want more customization and flexibility, there are ways to try and build on the strengths of indexing while trying to correct for some of its weaknesses. At Dimensional, we’ve been working on improving upon indexing for the past 40 years.
With all the options now available to investors, putting together a solid investment plan — one that you can stick with — is key. Markets have never been so accessible, and information has never been so widely available. But sometimes too much information can be overwhelming, and that’s when working with a trusted financial adviser, a fiduciary who puts your interests first, can help.
If you’re looking to become a long-term investor, consider committing to a lifelong strategy that takes your own personal goals, situation and risk tolerance into account. And remember that although the U.S. stock market has returned about 10% a year on average, returns for individual companies and individual years can vary wildly. (We call these uneven distributions “fat tails.”) It’s always important to look at the big picture. A huge win on a stock today doesn’t mean much if you lose it tomorrow.
I’ve been fortunate to make it through the market crash of 1973-1974, Black Monday in 1987, the Asian financial crisis of 1997, the tech boom and bust of 2000, and the Great Recession of 2008-2009. I’m sure you won’t be surprised when I tell you these were not easy times. For those who didn’t experience those periods firsthand, the anxiety they caused is just an abstraction. But now, a new generation of investors may be feeling the whiplash.
To them, I say, resist the temptation to be shortsighted. Consider being a long-term investor. Rather than focus on what the market did “that day,” look at what it did that decade. Investing is a lifelong journey. Making money slowly is much better than making — then losing — money quickly.
Original source: Market Watch