This article describes several strategies you can use to stay focused on your goals and risk tolerance when investing in the stock market.
If you’re an outdoor enthusiast, at some point or another you’ve probably contemplated what you might do should you encounter a bear or other wild animal. Wildlife experts typically recommend these tips: Stay calm and don’t run. Investors might also do well to heed that advice when traversing the stock market.
Plan ahead — Rather than fret about which way the market is headed this week or even this month, do what 87% of millionaires do to reduce worries — be proactive and develop a plan.1 A sound financial plan can keep you focused on your long-term financial objectives and keep you from getting caught up in the doldrums of a short-term market downturn or the hype of the latest hot sector.
Hold on — A buy-and-hold investing strategy can also help keep you from being distracted by short-term market performance. It can also potentially help reduce the risk of loss over time.
Maintain realistic expectations — Consider that since 1926, the average total annual return of the S&P 500 has been 9.9%.2 Maintaining realistic return expectations can make it easier to cope with short-term market downturns.
Make diversification your ally — Different types of investments lead the market at different times. By holding a well-diversified portfolio of stocks and bonds, for example, you may increase the possibility that those securities that increase in value could offset those that decrease.
Try dollar cost averaging — Think about adding to your investments on a monthly basis as opposed to purchasing or selling securities based on anticipated market changes (called market timing). This disciplined strategy can take the emotion and guesswork out of investing. It might also save you money. By regularly investing in a mutual fund, for example, you buy fewer shares when prices are high and more shares when prices are low. Over the long term, the average cost that you pay for the shares may be less than the average price.
Seek expert advice — Meet with a qualified financial advisor regularly. In particular, you may want to get into the habit of beginning every year with a comprehensive portfolio review.
1Source: The Millionaire Mind, Thomas J. Stanley.
2Source: Standard & Poor’s, 2011.
© 2012 McGraw-Hill Financial Communications. All rights reserved.
January 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by D3 Financial Counselors, a local member of FPA.