This article was published in the New Haven Register on August 4, 2019.
Stock market indexes recently reached all-time highs, and the media reported every upward tick of the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq Composite. Whether you are invested in the market or not, following the upward march of stock values can generate very strong emotions based in hope and fear.
Let’s say you have a significant amount of money in a savings account, sitting on the sidelines. You may react to the news of market highs with hope — or a fear of missing out — and decide to jump in and start investing now. Or you may react with fear, wondering whether the unprecedented, 10-year bull market is nearing a crash, and so you stay put.
Or perhaps you are fully invested in the stock market. You may react with hope and do nothing, or you may react with a fear of heights and pull some or all of your money out of the market.
Successful investors avoid these scenarios. Allowing emotions to drive investment decisions causes investors to buy high and sell low, a recipe for lower gains. Keep your emotions in check by becoming a logical, long-term investor with the following strategies:
Understand the cycle of gain and loss. Investors with a long-term outlook know that ups and downs are in the nature of the market, which is subject to national and global economic conditions, geopolitical events and industry trends. Market indexes fluctuate year to year, but “up” years have historically outpaced “down” years. If you pull your money out of the market during a down year, you will miss the gains that would have come your way during the next up year.
Follow a financial plan. As a financial planner, I discuss my clients’ individual goals and then tailor a long-term financial plan designed to help them reach those goals. Whether you enlist expert help or go it alone, you must have a written financial plan that includes investment planning, retirement planning and tax planning. Your plan will include the types of investments you will utilize, including some conservative choices such as AAA rated corporate or municipal bonds. You may need to revise your plan periodically, based on life changes or economic conditions, but not based on emotions. Following your plan despite the market’s ups and downs will help you avoid emotional investing and eliminate uncertainty and indecision.
Diversify and rebalance. Diversifying your portfolio by investing in stocks, bonds and alternative investments such as real estate tends to provide protection from market risk over time, since one class normally will head upward while another class stagnates or drops in value. (The 2008 economic crash was an exception to this rule.) Also, you must periodically rebalance the investments in your portfolio, since the values of your asset classes will rise and fall over time.
Hire a professional financial planner. Having an experienced financial advisor on your side gives you someone to communicate with, and financial planners are trained to help you avoid letting your emotions get the better of you.