Do you dread challenging markets? Do you break out into a cold sweat when your investment statement arrives in the mail? Many of us don’t understand the positives, yes, I said “positives”, of the opportunities that present themselves in volatile markets. Retail investors exhibit several common traits. First, they typically like to “buy high” and “sell low” based on fear and not sound research. Second, their idea of diversification is to own several different accounts with a myriad of investment positions in each one. This is not only a complicated method of living but fraught with issues such as investment overlap and possible sector concentration.
A better method of achieving your long-term investment goals is to develop a plan of investing that does not change with market cycles. This type of approach will serve you well in the long-term since you are dollar-cost averaging by investing each month (or some predictable cycle). In a market expansion, your constant investment amount will buy fewer shares or units of a particular investment. However, in a declining market, such as the one being experienced in the United States at this time, your consistent investment amount will buy more shares of a particular investment due to the lowered buy price.
Dollar-cost averaging doesn’t guarantee success of your portfolio but it does utilize the natural market cycles to help you achieve a potential lower average cost in the shares/units you purchase over time. For example, if you are investing $1,000 each month in your portfolio and the shares are $50.00 each, you may buy 20 shares during the month. However, if the market is declining and shares are now $40.00 each, you may buy 25 shares during the period. Over time you may experience a lower average cost of investment in each share.
In our previous example, assume the investment is a company that has a history of paying excellent dividends and has weathered many difficult business cycles. The company’s management gives you confidence that it will, once again, keep the company moving in a positive trajectory despite the economic hardships. By focusing on facts and not emotions, the probability that you will achieve your investment goals is much greater. Remember the quote from the “Oracle of Omaha” Warren Buffett, “If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.”
I understand it is difficult and takes great courage to weather some of the more difficult economic cycles the United States has suffered. However, remember that you will be using the totality of your investments for supporting your lifestyle in retirement and it took you many years to accumulate the funds. One or two negative market cycles will give way to more positive cycles at some point. The future isn’t hard to predict if you create it yourself.
Establish your investment plan based on sound logic and economics. Don’t attempt to time or “outsmart” the markets. Many bankrupt individuals have attempted these approaches. If you have questions on establishing an appropriate strategy for your lifetime accumulation of retirement funds, contact a CERTIFIED FINANCIAL PLANNERTM professional. The best counter to emotional disruption during a negative market cycle is to think long-term and stay with the plan you developed. Now, go out and enjoy your day. You got this!
Registered Principal, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Jimmy J. Williams is an Investment Advisor Representative of Compass Capital Management, LLC, a Registered Investment Advisor. Cambridge and Compass Capital Management, LLC are not affiliated. 321 S. 3rd, Ste. 4, McAlester, OK 74501.