With the DOW Jones Industrial Average striving to reach 20,000 (19,933.81 as of December 23), it creates an investment environment that can easily send investors into a frenzy over what sorts of investment moves should be made. Understandably, investors don’t want to lose out on the upside of the recent market upswing, but there are a few ways to set yourself up for success so that you don’t need to make any rash money moves based on a reaction to current market trends.
It’s important to remain focused on your long-term financial goals in the midst of short-term stock market activity. While it’s tempting to react to current market conditions, take note of a couple ways to approach investing so that you are poised for long-term financial success through all market cycles.
[Related: Ways to Overcome Investment Analysis Paralysis]
Diversify, Diversify, Diversify
If we’ve said it once, we’ve said it 1,000 times: diversifying your investment portfolio is one of the wisest ways to invest for the long-term. There will always be market volatility. Sometimes the markets perform well and go up (like they are right now). And sometimes, like at the beginning of 2016, they show stagnant or poor performance. Regardless of what the stock markets do on any particular day, having a diversified portfolio means that you hold a mix of investments ranging from stocks (domestic and international), bonds, real estate, and cash. Each of these assets respond differently to market volatility and other economic events, which winds up offering you a measure of protection against losses.
The idea is to position yourself to take advantage of some upside so that your army of dollar bills can work hard to earn you more over time (stocks), while simultaneously protecting your investment portfolio from the downside (bonds). A balance investment portfolio helps to provide a more stable ride over the course of your lifetime.
Set It and Forget It
Most of us are not day traders, nor do we have the stomach for the amount of risk involved in trying to time the market to buy and sell at just the right time. As a long-term investor, you’re not looking to gamble with your future. This is why setting your investments and then forgetting about them is a smart financial decision. In more academic terms, the concept of “set and forget” is called dollar-cost averaging. This is a systematic approach to investing that automates when you buy into the market. Investors who buy at regular intervals monthly, quarterly, or semi-annually are practicing dollar-cost averaging
Dollar-cost averaging removes the emotion from your investment decisions and sets you on a path to buy into the market regardless of what the market is doing. Sometimes you’ll buy high and other times you’ll be able to buy low and your investments will average out over the course of your investment horizon. What’s even better is that you do have some flexibility with dollar cost averaging so you can make adjustments along the way. When the markets are low, you can decide to buy more shares at the time and when the markets are high you can buy less, but the point is that you are systematically set up to buy on a regular schedule so you’re never tempted to try to time the market or pull out of the market. You are able to guard yourself against making rash emotional investment decisions with dollar cost averaging, while still leaving yourself open to financial opportunities.
At the end of the day, it’s most important to stay the course, even when markets are performing at all-time highs. Avoid the knee-jerk reactions at all costs. We have a saying, “Be greedy when others are fearful and fearful when others are greedy.” When you are invested for the long-term, you can pay attention to market activity without succumbing to a fear-based or greed-based response. And if you have questions about your investment portfolio, don’t hesitate to reach out to your financial advisor and touch base. If you’re thinking about your financial future, now is a great time to revisit your financial outlook with a financial advisor and confirm you’re doing everything you should be doing to achieve financial success.
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