on August 18, 2020
Lately, the stock market has behaved like a kid on a teeter-totter, rocketing up and plummeting down just as quickly. It has defied logic, remaining robust while unemployment numbers soar and small businesses shutter their doors. Even though it’s difficult to predict what the market will do next, that’s not preventing some people from trying. Amateur day traders try to jump in when stock prices are low and sell when they think prices have peaked…but rarely are these gamblers successful.
In fact, the vast majority of active traders do not beat the S&P 500 index over the long term. According to a U.S. News report, “Morningstar data shows that over a 15-year time frame, only 37% of active funds beat their indexes after fees are calculated. In 2019, only 29% beat their indexes.”
The market is getting more volatile and more difficult to predict. That’s why I highly discourage my clients from jumping in and out of the stock market. More often than not, being a jumpy investor doesn’t pay.
How should you invest, then?
Slow and steady, thinking long-term and diversifying your investments.
While that may be a boring path for some, it is certainly the safest route if you want to minimize risk (For more on long-term savings, check out this blog post). But what if you can’t stop thinking about your investments? With trading possible in just a few clicks, it’s tempting to give knee-jerk reactions to the market’s ups and downs.
I would advise the following:
- Stop babysitting your investments.
If you check them every day, you’ll be more emotionally invested in the numbers and more likely to do something rash.
- Stop checking the market.
You don’t have to entirely stop checking up on the health of the stock market, but it’s a good idea to give yourself some distance.
- Resolve to check with a financial advisor before making any significant decisions.
- Follow the 5% rule of short-term trading
If you are tempted to engage in short-term trades, never, ever funnel more than 5% of your portfolio into personal investments. And if it’s gone, it’s gone. You don’t get 5% more tomorrow. However, I would urge you to avoid short-term trading entirely. Again, consult your financial advisor before making any moves.
- Trust that the market will play to your favor in the long-term
Again, long-term investing is the smart, reliable way to go. In the words of Warren Buffet: “It is not necessary to do extraordinary things to get extraordinary results. By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”
Sit tight, don’t obsessively check the market, and vow to consult your financial advisor before making any significant financial decisions. It’s better to completely ignore your investments than to risk everything by buying and selling in the short term. Go outside, read a book…do anything to prevent yourself from becoming a jumpy investor. For the vast majority of people, this is the best and most reliable financial path.