We are currently in a period where equity markets are hitting new all-time highs. This creates a temptation to sell and wait for the markets to come back down to a lower price point. If you have extra cash, you might be thinking about delaying investing that money in the stock market. There is always going to be an emotional worry that you are buying at the worst time, and it certainly does not help when markets are at historic highs.
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But try not to let these short-term distractions derail your long-term financial success. Here are two ways to cope with the uncertainty of investing:
Dollar-cost averaging. No one really knows what is going to happen to the financial markets in the short-term. Historically, over the long-term, markets go up more frequently than they go down. However, the returns you will earn tomorrow, next week or even next year are nearly impossible to predict with any level of certainty. The individuals selling gold, seed banks, newsletters and bunkers are no closer to having the short term figured out than your local banker, your financial advisor or even Warren Buffett.
The best tool to ensure success is to take the emotion out of the equation. Instead of being frozen into inactivity and then kicking yourself later for the lost opportunity, create a plan of action to invest. Investors who are entering the market at what appears to be a high price should consider investing systematically. Buying at regular intervals, such as monthly, quarterly or semi-annually, is a mechanism that smooths any short-term volatility. The other benefit of regular buying is that, if the investment environment changes, you have the flexibility to adjust. For example, if the financial markets enter a bear market with a 20 percent pullback, you can always accelerate your investment plan to buy more shares at a bargain price.
A diversified portfolio. Unexpected events will continue to occur. World events, including Brexit, elections and terror attacks, sometimes have an impact on the stock market. Markets can be volatile, and it's easy to become emotional about the changes. The same people who are excited about the market's extended upswing might switch to panic mode and worry that they will not recover from the next event that causes a short-term panic.
The tool that will help you navigate uncertain periods is a well-diversified portfolio. Once you understand your risk tolerance and long-term goals, you can design a portfolio that should help you weather any stress or circumstance that the financial market sends your way. A mix of stocks (both domestic and international), bonds, real estate and cash will help you reach long-term success, since each asset reacts differently to volatility and economic events. These investments seldom move in the same direction at the same time, which offers you a measure of protection from losses in any one area.
Neither of these investment strategies involves trying to time the market. While it is tempting to try and find patterns in the stock market so you can buy low and sell high, the biggest obstacle to timing success is that you must be correct not once, but twice. If there is a major event occurring like a presidential election, you may be tempted to sell and wait to see how it all plays out. Unfortunately, even if your intuition was correct and the market declines, when would you buy back into the market? As we recently saw for those who sold investments prior to the U.S. presidential election, the market did not behave as the financial media predicted. The S&P 500 has actually increased since the election.
Be careful not to allow your emotions or the financial media to become a distraction that inhibits you from reaching your financial goals. Diversification and dollar-cost averaging are both logical long-term investment strategies that will help prevent you from making emotional decisions in the heat of the moment. While the stock market goes up and down in the short term, it also rewards long-term investors who stay the course.
Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, "The Money-Guy Show".
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