No doubt you’ve heard the catchy, all-too-common investing cliché, “Buy low and sell high.” That in a nutshell is “Market Timing.” When stock prices are their lowest, you want to buy. And when they’re at their highest, you want to sell.
Makes a lot of sense, but nearly impossible to do. Even serious investors don’t get it right most of the time. In fact, one study found that when professional money managers tried to time the market, it resulted in worse performance than if they had just stuck to the original plan.
So what’s a regular investor to do?
While there are no guarantees for success with any investment, here are four, time-tested actions that have helped investors stay focused through the market’s ups and downs:
Invest regularly, and often.
Pick a specific amount and a monthly frequency to invest, like $100 per paycheck. By putting your money into the market in smaller amounts, at regular intervals, you’re putting one of the smartest long-term investing strategies to work automatically - dollar-cost-averaging.
Dollar-cost-averaging is when you use a fixed dollar amount to buy the same investments on a regular schedule, no matter what they cost. If the markets happen to be down on the day you buy, you’ll score more of that investment for the same dollar amount, which balances out buying when the price is higher—and lowers the risk of buying only once at a specific time.
Develop a savings plan for all your goals and stick to it.
Instead of thinking of your savings as a big pile of non-retirement cash, break it up based on how you want to use the money: A wedding, vacation, new car, down-payment on a house, etc.
That way, if one of your accounts does see a 10% drop, you’ll be clear on how it affects that goal, and you won’t have to panic about how it impacts the rest of your financial life.
Keep a cash emergency fund.
Not all of your money has to be invested in the market. In fact, having a stash of cash that just sits in an account can actually make you a better investor.
It’ll protect you from the temptation to sell low if you need to have a certain amount of cash on hand, and you’ll know for sure that your accounts won’t ever dip below that amount.
Plan for risk.
Risk is a part of all investments. So, when you consider any investment in your portfolio, you should take into account what you’re investing for and how soon you’ll need to access the funds. The sooner you need the money, the less risk you may want to take on.
For instance, a wedding in a year might be a low-risk investment portfolio because you need to have that money to pay for it. A child’s education in 15 years or retirement in 30 means you can withstand a bit more risk because you can always adjust your plans when it gets a bit closer.
Time in market beats market timing.
Here’s a fun fact about the markets that you might not know. Everyone likes to talk about annual returns, but those numbers are usually driven by a handful of very good days during the year. If you’re trying to time the market, you’re likely to miss those days, and the gains that come with them.
Successful investing often comes down to “time in market” not market timing.
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