By Marjorie Smith, CFP®
Disciplined Investing Leads to Success in the Markets
The irony of investing is that people often feel most comfortable buying stocks when the market is “high” and expensive. They see others growing assets and do not want to miss out. That’s fine. One of the most valuable--and most often ignored-- pieces of investment advice is that you cannot time the market. While historical performance does not guarantee future performance, since 1926 the S&P 500 stock index has delivered an average return of approximately 10%. Instead of sitting on the sidelines, waiting for the “perfect” moment to invest, it is best to get in and start participating in the growth of the American economy and world markets.
The problem is that many investors do not get in and stay in the market. They panic during market declines or when we experience the kind of volatility currently roiling markets. When markets drop, they fear losing everything and want out no matter the loss. They sell “low”, lose a significant amount of money in a short amount of time, and stash what is leftover in a low interest earning bank account where it loses pace with inflation.
It is easy to understand such a response, especially when someone has entered the market “high” only to see a dramatic drop. To avoid making a major financial mistake, investors must be realistic and resolve to be disciplined when entering the market.
To invest in a sustainable way, investors should first identify and come to terms with their tolerance for risk. They should then allocate assets accordingly. There is no heroism in investing aggressively if one simply does not have the stomach for it. That person will only lose sleep and be vulnerable to making bad decisions during down markets. At Pacific Wealth Management (PWM), we work with our clients to ascertain their true tolerance for risk—not what they feel they should be able to tolerate. It’s about being realistic.
Investors must also understand that markets fluctuate over time, but they generally grow. We will experience some phenomenally great years and some abysmally bad years. The market generally climbs over time, however, at an average growth rate of 10%.
Those who have entered the market since the housing crisis of 2008 may not have been prepared for anything but a consistently booming stock market. More normal-- and definitely inevitable--is the kind of choppiness that we see now. At PWM, we have anticipated this slow down, accounted for it, and know that it is part of general market expansion.
Investors who have identified an appropriate investment strategy should rely on a plan that includes regular deposits into an investment account. They will achieve value through dollar cost averaging, and they will make investing a habit. They must also have the discipline to stay invested. More than timing the market, consistency and discipline will keep people on the path to their financial goals. They will tune out “noise” and avoid making emotional investment decisions.
This measured approach does not come naturally to everyone. We are here to implement a sound financial plan that reflects your priorities and circumstances. We also serve as a sounding board and provide expert objectivity when you need it. Please contact us anytime with questions or concerns.