Invest in your Financial Future for FREE

Learn everything you need to know in '9 Secrets of Successful Wealth Management' for FREE from The Successful Investor.

Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.

 I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Topic: Wealth Management

Investor Toolkit: How the stock market can punish investors who worry about the wrong things

Investment CounsellorToday’s tip: “When investors worry about things over which they have no control, they can be drawn into ill-advised buy-sell decisions that are almost certain to decrease their long-term profits.”

Many investors spend a lot of time worrying about the wrong things. In particular, they worry about things that are unpredictable. Even if they happen, these things may have only an indirect impact on their long-term profits. As a result, they have little time to pay attention to things that have a direct impact on the value of their investments.

For instance, at times they may mull over every tidbit of economic information that comes out, and how it differs from its predecessor of a week or a month earlier. They hope to detect a pattern—a sign that the economy is mending and headed for a return to steady growth, say, or perhaps deteriorating and doomed to plunge into a new recession.

Others look for patterns or omens in domestic or international politics, or in demographic data, or in the price of gold. This can eat up an awful lot of time.

These investors often feel they can cut their investment risk by selling some or all of their stocks in times of high risk, and buying them back when risk is low. This never works well for long. After all, risk as portrayed in the media, and genuine market risk, are two different things. No matter how you try, it’s hard to pinpoint market turning points, if only because you have to outguess so many other smart people who are trying to do the same thing.

Why stocks imitate the traffic on freeways, not elevators

You’ll rarely if ever sell near the top, nor buy back near the bottom. If you could do that with any consistency, you’d “make all the money in the world”, as the saying goes.

If you constantly worry about the “big picture”, you may at times manage to sell at just the right moment to sidestep a serious downturn. But you may only do that after sitting through a series of downturns. The downturn you avoid may turn out to be the last in a series—the “final leg downward”, as short-term traders like to refer to it.

The next big move in the market may be upward. You need to get back in the market or you’ll miss out. Wait too long and you could wind up paying more than prices you got when you sold.

Note, however, that the stocks that make up the market don’t go up and down like a bunch of people in an elevator. They are more like commuters in a city. Most go the same way every morning and evening, with the traffic. But lots of others go against the traffic, if only sporadically.

Some commuters head off for work at the same time every day. Others are often late. But the real go-getters are the first to arrive at the office, and last to leave. Here the analogy is particularly apt. When the market pulls out of a slump, the best stocks for the next rising phase may have already begun to rise. In fact, some will have begun to rise before the slump began.

Comments

Tell Us What YOU Think

You must be logged in to post a comment.

Please be respectful with your comments and help us keep this an area that everyone can enjoy. If you believe a comment is abusive or otherwise violates our Terms of Use, please click here to report it to the administrator.