If you have money in the market, you may sometime wonder what on earth is going on in the financial world. One day, the stock market is down 200 points; the next day it's up 300. One day, a scandal rocks a company; the next day, another firm declares a poor earnings report.
Isn't there any completely smooth route for you to follow as you pursue a comfortable retirement and other key objectives?
Actually, there isn't. But you can help smooth out your journey by following a few basic "rules of the road."
Here are a few to consider:
Create a plan -- It's important to know where you're going so you will know when you get there. You can waste a lot of time, effort and money through haphazard investing. That's why you need to create a plan that defines your long-term goals and establishes a strategy to achieve them, taking into account your individual tolerance for risk and your time horizon.
Take action -- The best plan in the world is useless unless it's implemented. Once you've set a course of action for yourself, follow through on it. Don't wait for the "time to be right" before you invest -- because you can always find excuses to delay. The best time to get started is right now.
Stay invested -- When the market is "hot," it's easy to for people to keep on investing. After all, everyone else is doing it, with apparent good results. But it takes far more courage to continue investing during a long bear market, when so many people head to the "sidelines." And yet, it's essential that you do stay invested, through good times and bad. Ultimately, the long-term performance of the investments you have chosen will have far more impact on your portfolio's success than the daily price fluctuations that are an inevitable part of investing.
It also helps to filter out some of the negative news the media reports.
In a 1993 study, two university professors -- Robert Lichter and Ted Smith -- analyzed more than 17,000 economic stories broadcast on the three major networks -- ABC, CBS and NBC. They found that roughly 85 percent of economic news stories "had a negative tone." Ironically, the highest periods of negative reporting came not during economic recession, but during times when the economy was expanding.1
Look for quality -- Persistence in investing, by itself, isn't enough to help you reach your long-term goals. You also need to be investing in quality. Look for the stocks of those companies that have solid track records, strong management teams, competitive products and well-defined business plans. Of course, you'll experience ups and downs even in quality stocks -- but if you hold them over time, you'll greatly increase your prospects for success.
Diversify your holdings -- During any given market environment, some investments will be doing well, while others will not. You could try to pick the winners, but that's almost impossible to do with any degree of consistency. You'll be much better off by diversifying your dollars among a wide range of high-quality stocks, bonds, mutual funds, government securities and other vehicles. By staying diversified, you'll help cushion yourself against downturns affecting just one type of investment -- and you'll multiply your opportunities of benefiting from assets that are performing well.
Review your plan -- You should review your investment plans and strategies at least once a year. Your life will constantly be evolving and you may need to adjust your plans to accommodate these changes. If some of your investments no longer suit your needs, you'll need to find other opportunities. A qualified financial professional can help evaluate your situation and make appropriate recommendations on rebalancing your portfolio.
As you can see, there's nothing magic, or even terribly complex, about any of these "travel tips." However, to follow these guidelines with patience and perseverance, you are well prepared for a fulfilling investment journey.
Scott Flake is a licensed financial advisor with the firm of Edward Jones. He offers free investment reviews and can be reached at (928) 468-1470.