Most folks make such big mistakes when investing, their returns often lag an index fund.
Most financial advisers use that as a reason to sell their funds. And while passive investing has a place in a 401(k) plan, the fact of the matter is, average investors can and often do beat the pants off the market. They just need to conquer their emotions.
Most investors get hung up as they buy high and sell low, rather than the other way around. That’s why they end up underperforming index funds by a wide margin, time after time.
Buying high means giving into a sense of missing out a rally underway—even as it’s about to peter out. Selling low means giving into panic and fear at a time when the best course of action may be to buy more.
That’s why I find it helpful to think of buying stocks the same way you’d buy something on sale at the grocery store —where you want to maximize the value of your dollars and buy even more when something’s on sale.
Once that’s done, however, there’s something critically important that investors must do. It’s something even the top traders of all time have sworn by as well.
It’s a secret that I’m going to tell you. But when I do, I need you to do something.
I need you to stop, and think critically about how to best apply it to your finances and investments right now.
So here it is.
I might have been a bit too subtle about the most important thing you can do with your investments most of the time, so be sure to reread the prior paragraph a few times.
Most of the time, that’s the most important thing you can do as an investor. With all the daily noise of stock trading, it’s easy to lose sight of what really matters. And as I’ll often point out to subscribers when we have a position that’s struggling, as long as things are going well operationally, I’m okay holding on for a while longer.
That’s because how a company does operationally will make a difference to your wealth over time. Panicking over a big down day that isn’t as bad as it looks is something else entirely—but it’s not investing.
So do nothing. But be aware that sometimes, you may have to do something. A company that’s been delivering steady growth may start to see some signs of declining. In that case, it may be time to sell. And sometimes, the market seems to have nothing better to do than panic. That should be viewed as a buying opportunity.
Playing the waiting game and doing nothing until great opportunities come along is a cornerstone of the investment process. It’s easy to get caught up in the excitement of making trades or buying some fast-moving stock. But if you don’t understand the company behind it, and where the business is likely to go, all that guesswork will only pay off until it doesn’t.
So again, how does this apply to your portfolio? Only you can truly answer that. For many, hopefully most, of your positions, you’ll just need to keep on doing what you’re doing. For a few positions, if the company is no longer delivering on the reason why you bought shares, take a profit (or loss) and go fishing elsewhere.
Remember, doing nothing doesn’t mean letting your capital go to waste. It means letting the wealth building effects of the market work for you, even if you have to set your emotions aside amidst all the short-term bumps along the way.
So sit tight. Markets have been struggling year-to-date, but this clearly isn’t a selloff by any means. Despite the fear of a trade war, the collapse of Turkey, slowing growing in China, the US economy is showing stronger numbers. That’s a factor that matters more, at least for US-based investors. The fears will prove short-lived, as they always do. The facts of a stronger economy will push the prices of shares higher.
Our current market performance may just prove to be a long, sideways stretch. I certainly can’t blame the markets for pausing, given their 15-month rally between November 2016 and January of this year. Those usually end up leading to further rallies as well.
If you’re invested right, in companies moving society forward with breakthrough technologies, dividend-growth companies that lead their industries, and out-of-favor names like any commodity not named oil right now, you’ll do great.
If you take advantage of the short-term fears, you can trade profitably as well. This current trading environment—sideways with a positive bias—is a great time for buying on a down day and taking profits on an up day.
But if you still have lingering fear, just stay invested and then do one other thing. Nothing.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.
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