In many ways, the stock market is a living, breathing animal with the ability to thrive or dive at any moment. Have you ever taken a ride on a wild bull? Ya, me neither, but that’s the image I want in your head. As one anonymous professional bull rider said about riding a bull, “Riding the bucking motion must become second nature for a bull rider to have a successful future in the sport. Timing and rhythm can only be conquered by learning to ride the bucking motion of the animal.” Notice how he didn’t say that a bull rider should try to control the bull… clearly, that’s not an option when dealing with a big angry animal. The same holds true with the stock market.
Many people begin their investing career thinking that they can time the market, which in essence is like trying to control a bull. When it comes to investing in the market (whether it be through stocks, bonds, mutual funds, exchange traded finds, etc), the focus should not be on our ability to control or predict the movement of the market. Just like the bull has a mind of its own, so does the stock market.
Here are 5 tips on how not to “get bucked” from the market before your time is up:
1) Start slow and invest over time: We have a phrase for this in the investment world. It’s called dollar cost averaging. Assuming that the market will rise over long periods of time (Warning: there is no guarantee that this will happen!), investing a little at a time over long periods may provide us with a lower cost per share than investing a lump sum at the wrong time. Check out this 1 minute video on Investopedia.com for a more detailed explanation: www.investopedia.com/video/play/dollar-cost-averaging/.
2) Diversify your investments: Investing in one stock or one asset class is risky, because at any time, that stock or asset class can fall out of favor and the share price can drop significantly. A more prudent and potentially less risky method is to invest in multiple asset classes, thereby reducing the risk that one class loses value. For example, if you invest $100 in the market, it is technically less risky to invest $25 in stocks, $25 in bonds, $25 commodities and $25 in cash than it is to invest $100 in stocks.
3) Don’t make decisions based on emotions: This is easier said than done, but important none the less. Regardless of how high we think our risk tolerance is when the stock market is going up, we inevitably change our opinion when we see our brokerage account dropping in value. For many people, that experience is like throwing money into a fire pit. In reality, this is just another instance when the stock market is bucking. If you follow the above 2 steps, your best chance of success over long periods of time may be to resist the urge to get out of the market. Many times this is the wrong time to sell.
4) Keep your goals in mind: Before investing in the market, it’s important to set specific goals for your money. Determine when you will actually need it(timeframe) and also specify how much money you will need to fund your particular goal (buying a car, a home, going on vacation, etc.). (If you need the money in 5 years or under, the stock market may not be the best place to stash your cash.)
5) Schedule regular intervals to check in on your account: Whether you check in annually, semi-annually or quarterly, make sure that you have set times in your calendar to do so. Life changes often, and as such, our goals and circumstances often change along with it. This will also keep you abreast of how your investments are performing. If certain asset classes are doing better than others, it may be a good idea to rebalance your portfolio. Basically, this process entails selling appreciated asset classes and buying into depreciated asset classes to bring your diversification back to the appropriate level (in the above case, that would be rebalancing your account so that 25% of your money is in each of the aforementioned asset classes).
Overall, it’s important for people to understand that there are things we can control in life and other things we cannot. Changes in laws, tax rates, the stock market, etc. are all things that we cannot control, or predict, for that matter. What is within our control is the way we invest, spend, save, and live our lives. Depending on what path we take, we may even have control of the amount of income we generate for ourselves and our family. If it’s control you’re after, I suggest focusing in on these areas that you can control. In my opinion, it’s not worth getting frustrated over things that we can’t control. That strategy is very similar to the one the cocky bull rider follows before getting bucked off.
Disclaimer: The above post is for educational purposes only and should not be taken as investment advice. Each person’s individual circumstances may vary, and as such, so might his/her approach to investing in the stock market. Please seek the advice of your financial planner or tax professional before making any investment decisions.