Many things can affect your investment, from political, global economics, to pandemics. That is why I decided to share the top 5 tips to develop your inner Investor.
“Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.”
Most investors don’t do well timing the market, and trying to find the next Amazon could result in a lot of bad investments too! Take some risks with a small portion of your portfolio but keep the vast majority in strong companies you want to own for a long time and ignore the short-term news!
Investing during a volatile market can lead to emotional decisions but fight those emotions.
1. Invest in Equities (Stocks)
Many people feel like stocks are not worth the risk, but I am here to say that if you are investing for 10+ years, you need to invest in stocks! The stock market is a great way to build wealth. It is especially easy for investors with the availability of low-cost ETFs that track indexes like the S&P500 which takes the research and time out of investing.
With many investment analysts talking about a bubble, shouldn’t I be afraid of the market crashing? Yes and No. Does the market make me nervous? YES! I could lose money, but I make my investment decisions based on data. Looking at the data, the longer you invest, the lower the risk, and the higher the returns!
Don’t believe me and not willing to take my word for it? I don’t blame you! Well, let’s look at some data that Aswath Damodaran, a professor at the Stern School of Business at New York University who specializes in corporate finance and valuation, has compiled.
|1 Year||3 years||5 Years||10 Years|
|% Positive return||72.8%||83.3%||87.5%||94%|
|Best Return||52.6% (1952)||30.9 % (95-97)||28.3% (95-99)||20.1% (49-58)|
|Worst||(43.8)% (1931)||(27.3)% (30-32)||(8.4)% (37-41)||(1.7)% (29-38)|
Note: All Returns are annualized
As you can see at just three years invested you are at an 80% chance of profiting and by 10 years that rises to 94% with the worst ever downside being -1.7%. Not as risky as first perceived once we dug into the data right?
On top of having great returns, you also have the potential to build a portfolio that delivers monthly passive income through dividend-paying stocks! There are tons of possibilities when you invested in the market! So don’t delay, invest today!
2. Ignore Short-Term turbulence
There will be plenty of times that a stock will bounce up and down. The stock movement could be a result of breaking news, a presidential tweet, or something that the company did. These events can be great opportunities to buy, not sell!
An example would be the removal of Citigroup from the Dow. This negatively impacted Citigroup even though it does not affect the performance of the stock nor the company. Additionally, Citigroup is still a member of the S&P500, which has significantly more funds than the Dow.
If the news does not fundamentally change what the company does or why you invested in it, ignore the news! Most likely, it won’t matter in a year or two.
3. Adjust Your Portfolio
If the company you are invested in is facing headwinds that are not temporary, a decision will need to be made if the money invested would be better used elsewhere. I will use Sears as an example as the stock was royalty in the shopping world for years! Then this little startup book store called Amazon entered the marketplace and Sears may not be around soon.
These kind of changes usually do not happen overnight but are the kind of things investors should pay attention to. News like this is less of an issue if you stick to ETFs.
Another aspect of adjusting your portfolio is balancing your diversification. If your goal is to be 70% stocks and 30% bonds, it may require trimming some of your stocks to buy up the bonds. This can also be done to diversify between industries or companies in your portfolio. My preference is not to sell but instead, use the dividends to help balance out my portfolio.
4. Protect what you need
If you think you will need the money within the next 3-5 years, it is probably best to put them in safer investments that align with your risk tolerance. The other option would be if you want to roll the dice, keep that money in stocks with the understanding there is a chance of taking a significant loss when you need it.
What you have saved and invested should be protected as you approach the time you need it. Do not throw away all the hard work and financial accomplishment, trying to get a few extra percent just before you need it.
In a near-zero interest rate environment, taking money out of the market can be painful. You should know that there are alternatives to a high-yield savings accounts. These alternatives are worth looking into when trying to get slightly higher yields without risking your money.
5. Track your Financial Position
While I do not recommend tracking the market closely, I do however recommend tracking your full financial picture closely. It would be best if you focused on building your financial fortress, which can only be done by evaluating your debt, earnings, investments, investment performance, and insurance.
Financial advisors can help you build plans to pay down debt and determine investment goals. As you review your portfolio, having goals is very important as the actual returns may or may not match the assumptions used. Thus you may need to invest more to make your retirement or other investment goals.
While nothing in this post is probably mind-blowing, it can have a considerable impact on your investments and how you build wealth! These are some tips to help manage your portfolio yourself, but if you have any doubts, you should always consult a financial advisor.
Since I started this post with quotes from Warren Buffet, I will end it with one:
“You can’t produce a baby in one month by getting nine women pregnant.”
What he is saying is that some things just cannot be rushed as they take time! Investments are not exceptions to this rule, and there is no get rich quick scheme!
Last but not least leave a comment below on your thoughts of which of the top 5 Tips to Develop your Inner Investor is the best! If you have any additional tips feel free to leave them too!
This post is my opinion, which is strictly for information & educational purposes only. The post is not intended to provide any investment advice. Please seek your own duly licensed professional for investment advice as they will be able to consider your situation. Please read my Terms & Conditions Page for a full disclaimer.