“No one gets hurt on a rollercoaster except for those that jump off
— Dave Ramsey
With the rapid rise of smartphones and the internet, we are inundated with information on a daily basis. This is both a blessing and a curse.
Readily accessible information is fantastic to discover new information that will improve our lives. The problem is that we are easily distracted. I am anyway. I’m sure I’m not the only one? Echo, echo, echo.
These distractions take us away from the valuable information we should be paying attention to and move us towards useless entertainment that teaches us nothing and improves our lives in no way whatsoever. Be that checking in on Facebook, watching cute dog videos or browsing trade me at houses just because. Reading this blog is a good use of time 😊
What was I saying again? Oh yes, we are not always rational and we can let emotions get the better of us. This is natural. We are more concerned about losses than gains. We place more emphasis on recent information, even if it less important. We make snap decisions and then rationalise them, rather than thinking logically, and then deciding.
The point of what I am saying is to be a successful long-term investor you want to avoid all these things. You want to be rational. You want to have a long term, not short-term focus. You don’t want to be distracted by what other people are telling you about the share market. You want to pay attention to the important information, so you can increase your knowledge base.
SO, HOW CAN WE STOP OURSELVES FROM STRAYING?
Stop listening to everyone else’s stock market predictions. They may be right, they may be wrong. The main job of the media is to sell news. A lot of information is exaggerated, either towards the good end of the scale, or the bad end. You don’t hear about stock market gaining 8% in a year. You will hear about a fall of 1%. This is because people are predisposed to pay more attention to losses than gains. Don’t be scared off your course.
Keep a long-term focus. Short term noise in the market will make you want to jump ship. Stock goes up, stock goes down. Understand that there is volatility in the short term, but over time the value of most companies will go up.
Don’t stop investing. In the beginning it can seem like we are getting nowhere with our investing. In article 10 we discussed how it takes quite some time for us to see the benefits of our investments. This is a sticking point, but if you can keep investing past the point, you will start to see the benefit of your work as your money starts earning you money whilst you sleep.
Don’t try to time the market. We have discussed this in length during the investing series. When timing the market, we will either spend too long sitting on the sidelines or we will only buy stocks when they are high and expensive, selling when they are low and cheap. Our returns over time, will be less than those that rode the wave. We can’t lose money if we don’t sell.
Know the market. Know that you may experience large losses in value. We should always invest in something that we understand. If we don’t understand, we are more likely to get shocked, and then have a bad experience making us want to exit. If we can understand the risks and the rewards, we can be much better prepared, and likely to stay in the game.
Do not think the share market is a get rich quick investment. If we come in thinking we will become a millionaire overnight, we will be sadly disappointed and less likely to invest in the market. The share market is one of the best ways to grow our wealth, but understand it will be gradual.
March to the beat of your own drum. The share market can experience big bubbles. Bubbles are a rapid increase that can’t be explained for any fundamental reason. They are fuelled by people’s emotions and stories. Word gets out about this amazing investment and more and more people blindly jump on the bubble through stories of other people getting rich. It is very difficult to watch other people get rich off bitcoin increases this year, but it is not in my plan because it is more risk than I am willing to take. Because of this, I stay right away. The herd can get noisy so stay strong to your strategy. Don’t invest because someone tells you it is a good idea. Invest because you want to, and it is the best thing for you.
Don’t look at your performance constantly. The more often we check the value of our portfolio or watch the market movements on the news, the more we will feel like we have to do something. Heat of the moment emotions can make us do non-rational things. If we only look every few months, we will save ourselves plenty of stress and from doing something we may regret. I will say it again, If we don’t sell we can’t lose money.
Ask for help. If you are unsure of anything, find an adviser or a trusted friend to discuss things with. Someone that can hold you accountable can be a great motivator to not doing anything silly.
Have clear investment goals. If we can see that our investments are helping us to buy that house, or save for retirement, or go on that world trip, then that is a great motivator to stay the course.
Don’t be discouraged. There will always be someone that ‘gets lucky’, or is doing better than you. They may be further along on their journey. You may start thinking it is too hard or not for me. Remember, you may be only at the beginning of your journey. Don’t compare yourself to others. It is you and your own goals that matter. Soon enough, someone may be looking up to what you have achieved.
Stay diversified. A well-diversified stock portfolio will reduce the chances of large losses. If we only invest in 1-10 companies, a loss from just one company can have a big impact on our returns, which may scare us off investing.
Well that wraps up the 14-part series – beginners guide to investing. Most of the focus has been on the stock market due to the financial growth and tax efficiency that the market can provide us. We did touch on other methods of investing in part three.
There are several other forms of investing not touched on, but this is just a beginners guide to investing and wealth. Once you have more experience with investing then you may consider alternatives if you wish. Speculative investments such as bitcoin, gold and derivates can have a place in a more experienced investors portfolio. Because there is a gambling element involved in these types of investments, I would never put more than 5% of my portfolio into these investments. They can be good for someone looking for a bit more excitement in their investing. They can fall just as easily as they can gain though so it is prudent to only use the amount of money you are comfortable with losing if things go wrong. That is where a percentage such as 5% can work well.
However, we can achieve a fully diversified, low cost portfolio with only four funds: A local (NZ or Australian) share market low cost index fund, an international low-cost share market index fund, a conservative (bonds and cash) fund, and a REIT (real estate) fund. The ratios on each depending on our tolerance for risk and our investing timeframe. Growth, value, dividend or cap specific funds can be added for further diversification should we wish. It is possible to over diversify though, so be aware of any overlapping investments with similar characteristics.
Minimising fees and maximising diversification will minimise the losses we will make from investing. As will dollar cost averaging and having a small percentage of our portfolio in an actively managed fund. An actively managed fund, although more expensive, can offer more flexibility in a down market. When managed by a professional, our portfolio is managed without your emotions getting in the way of reason. If we have been reluctant to invest in the stock market, learning how to minimise our losses will be key for our peace of mind. Rebalancing our portfolio every year, or when an asset class rises or falls above our threshold, will force us to buy low and sell high which is a good habit to follow to further minimise losses. This is key as we now know that gains from losses take longer than losses from gains.
If we learn how the stock market works so that we understand what we are investing in, then we will be well prepared for any volatility. The stock market is not a place for emotions. Knowledge helps to eliminate our over or under confidence. Knowledge gives us the confidence to invest, and also has the opposite effect of reducing any overconfidence we had before knowing the share market ins and outs. Seems ironic that the more we know, the less confident we may become right? I know of several people investing large amounts in bitcoin at the moment only because of all the hype over how well it is doing. I asked a couple of them a simple question: what is bitcoin? They couldn’t give a good answer. They are overconfident. If they learned more about what they were investing in they may still invest, but at least they will be more prepared for any consequences. They would be a lot less confident, and more realistic. I can see some hurt if things don’t work out.
The goal of the series was to make the stock market a less scary place for newbie investors and have people at least consider the share market, that may not have considered it otherwise. If done right, it is not as much a gamble as we may think. The tips may not be for everyone as there is never a one size fits all for investing. Most of these tips apply to risk averse investors. If you like risk, you will have slightly different ideas. Take what you can that applies to your situation. If I have encouraged at least one reader to take the first step, then I will be happy.
Thanks for reading.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here
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