Follow sound principles with markets
“Derek, I’m trying to time the markets. When is a good time to get back in?”
Every investor dreams of buying low and selling high, but of course this is not easily accomplished.
However, through different market cycles many investors do just the opposite: they tend to buy when the market is near its peak and sell when the markets are beginning to struggle.
This is common, due to investor psychology — when the markets are doing really well investors begin to feel more confident in their decisions, which can lead to taking on more risks and buying when things are too high.
The opposite is true in a bad market; investors regret their decisions and begin to fear further declines, and ultimately may choose to sell right when things are about to change for the better.
My advice? Don’t give into emotion, and follow these sound investment principles to help keep up in today’s fast-changing markets.
Don’t try to pick the tops and bottoms.
Markets move too quickly and are unpredictable at the best of times to effectively catch the highest and lowest price.
Too many people jump on a “winning stock” only to find out later that they bought it at the peak.
Conversely, others decide to buy shares in a failing company, hoping for a possible turnaround — which often never materializes.
Instead of giving into these emotions, consider investing where you may be able to find consistent returns from dividends with potential for growth.
Average your costs.
Since we never know when an investment will reach a top or bottom, it is often best to average your costs. In short, buy some today, wait for a defined period of time and then buy some more. This may be accomplished by investing monthly, rather than waiting for a year-end bonus and investing all at once.
By averaging your costs, you minimize the impact of market changes to your portfolio.
Don’t check your portfolio daily.
As tempting as it may be to watch the money roll in or keep tabs on things when the market is shaky, avoid checking your portfolio daily. This can be damaging as it often causes investors to overreact to short-term prices and make impulsive decisions.
Often, it is these impulsive decisions that lead to selling at a low, or buying at a high. Rather, focus on my next point.
Invest with a long-term horizon.
Like it or not, there will always be a reason not to invest. There will always be a headline, or political reason, or world event that causes investors to question if they should be selling. As dramatic as these events may seem, they are often not impactful to long-term investors. As such, ignore the short-term fluctuations.
My final thoughts? Being disciplined is the key to success when it comes to investment. Keep focusing on the long-term, remember the reasons you invested in the first place, and if possible average your costs.
Finally, remember that it’s not about timing the markets, but spending time invested in the markets.
Derek Fuchs is a wealth adviser with ScotiaMcLeod in Red Deer, and a certified financial planner, financial management adviser and fellow of the Canadian Securities Institute. He can be contacted at firstname.lastname@example.org.