Three Keys to Successful Investing
Successful investing is more simple than you think…
Despite what Wall Street and the media often lead us to believe, successful investing is not a complicated process. The fundamentals of investment success are actually quite simple.
And yet, sadly, most investors do a very poor job of managing their own money. In fact, a recent study by Dalbar Inc. found that, from 1984-2000 - the best run in the U.S. stock market’s history - the average investor underperformed the stock market by 10% per year, trailing even the return of Treasury Bills (the safest, lowest-yielding investments)!
So, if the principles of successful investing are simple, why are so many investors doing so poorly?
In a word: Emotions. Investors let their emotions dictate how they invest, and that is a sure-fire recipe for disaster. It was emotions (greed) that led millions of investors to invest their life savings in technology stocks in the late 1990s, and it was emotions (fear) that led millions of investors to flee to money market funds in 2002, just before the market began a dramatic recovery.
If you are to succeed in building the kind of nestegg you will need to retire on, you must avoid making short-term emotional decisions with your money.
Following these key principles of successful investing will help ensure that you have all the assets you will need in retirement:
1. Let your needs determine the amount you invest in stocks:
Don’t make the mistake of basing your investment decisions on the current state of the stock market. Your exposure to stocks should be based on your needs - specifically, how much you need to grow your assets to achieve your retirement goals. Investors who have amassed a considerable amount of money and are close to reaching their goals do not need as much exposure to the stock market as investors who are a long way from retirement and need to grow their nestegg.
Remember, the stock market moves up and down dramatically in the short term, but over the long term the market has delivered steady returns for more than 200 years. Don’t let short-term volatility keep you from investing the amount in stocks you need to achieve your long-term goals.
2. Diversify away unnecessary risk:
Many investors take unnecessary risk - that is, risk that they do not need to take to achieve their investment goals. For example, an investor who needs to grow his assets substantially would need a significant investment in stocks, but it doesn’t need to be concentrated in just a few stocks or market sectors. Investors who concentrated their assets in technology funds a few years ago learned this lesson the hard way.
By spreading assets across a variety of sectors and styles - large and small stocks, growth and value stocks, foreign and domestic stocks - an investor can obtain the high returns that stocks have historically delivered without taking on the unnecessary risk of being concentrated in one corner of the market.
The good news is that, in the Advisors Access 401k, you do not have to make these decisions yourself. The Advisors Access managed portfolios are diversified across a wide variety of asset classes and investment styles, freeing you to simply choose the portfolio that best suits your risk and return needs.
3. Don’t “chase” performance:
Many investors make the mistake of shifting their money around to whichever segment of the market has been the hottest lately. They hope that they will be able to “join the party” and enjoy the unusually large returns that a particular segment of the market has been enjoying recently. Wall Street and the media encourage this short-term view of investing by focusing on hot stocks, hot sectors and hot mutual funds.
However, the disclaimer “past performance is not an indicator of future returns” is also the truth! There have been many studies conducted that have found there is no relationship with how an investment has done in the past and how it will perform in the future. In fact, most investors arrive on the scene too late, just in time to catch the hot sector on its way down. Again, many investors experienced this first hand with technology stocks in the early 2000s.
Don’t make the mistake of chasing performance. Find the strategy that is right for your long-term needs and avoid the temptation to let the short-term “noise” take you off track.
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