7 Valuable Lessons For Investors
The market can humble even the greatest investors. That's a key lesson for anyone who has money in the market, according to
"You really have to have an overall respect for the market and the forces at play and all the cross currents that exist," says Fertig, who's also the author of The Seven Deadly Sins of Investing: How to Conquer Your Worst Impulses and Save Your Financial Future.
In this stomach-churning market of dramatic highs and lows, it's easy for investors to lose their way. It may be time to reevaluate your
strategy and refresh your investing know-how. With that in mind,
1. Take the emotion out of investing.
High-octane funds can be emotional tripwires. A fund that rocketed 70 percent over the past year may look irresistible, but beware. Often, those that experience astonishing short-term performance gains eventually fall hard, and jumping in at the wrong time can lead to crushing losses. Emotion-driven investing is perhaps one of the hardest habits to break, especially during one of the most powerful rallies in market history. "You can easily fall in love with a stock a little too much. You can trade too much. You can buy something only because you see other people buying it," says Fertig.
His advice: Ignore the noise, make investing a long-term pursuit, and stick to your strategy. It's easier said than done. One way to reign in your emotions is to commit to putting money into the market at regular intervals as opposed to a large chunk all at once -- otherwise known as dollar-cost averaging. "That's the most simple way of doing it; to not necessarily go all in at once but scale in over time. If you were thinking about putting money in a week or two ago, maybe during the recent selloff put a little money in," Fertig says.
2. Cost matters -- a lot.
The market's twists and turns are unpredictable, but mutual fund costs are not. And they're one of the biggest contributors to, or perhaps detractors from, your long-term performance. Expressed as the expense ratio in fund literature, fund fees include management fees, administrative costs, and marketing expenses, and they can take a big bite out of your investments over time. A 1.5 percent annual fee may not sound like much, but the results can be startling. Take two equity-income funds, one which charges 1.5 percent annually (an actively managed fund) and the other, roughly 0.4 percent (an index fund). Over a period of 20 years and assuming an average annual return of 7 percent,
"A lot of funds charge 1.5 per year to manage, and they don't do any better or they do the same as the
3. Embrace change.
If your portfolio leans heavy on the
How to revamp a rusty portfolio? Adding some exposure to emerging markets and technology may be a good start, says Lutts. "Globally, there's a new growth generator in our economy. It's not the U.S. and
4. Set clear investing priorities.
In other words, your first decision as an investor shouldn't be what you should invest in; it should be what you're investing for. "What makes successful financial life is different for everyone. Some want to lead a lavish lifestyle, others want a simple lifestyle but don't want any debt, or maybe you want to make sure you don't outlive your money," says
5. Know when to cut your losses.
Determining when to sell a stock is just as important as knowing when to buy, says Lutts. "Invariably, people don't know how to manage losses. There's one way to not let a loss grow really big, and that's to sell it when it's small." Lutts recommends that once investors set a sell trigger. Within his firm, that's a loss of 20 percent from the stock's purchase price. At that point, "we sell, no questions asked. What's so magic about 20 percent? Nothing. You could do the same thing successfully with 15 percent. The point is to draw a line in the sand," says Lutts.
6. Understand your risk tolerance.
When the market's on a tear, investors are often apt to take on more risk, says Kay, "but when the markets turn negative, they think any risk they're taking is too much." Once you set your investing goals and determine how much risk you can stomach, stick to it. "Your risk tolerance should not change when the market goes up or down," he says. "You have to start with a core understanding of what your portfolio needs to generate to meet your goals and dreams," he says.
7. Account for inflation.
Of course there's risk in aggressive investing. A portfolio brimming with stocks will bounce around like a pinball at times. But one that's bulging with bonds and cash investments is also a gamble. "A big risk for people investing for the long term is inflation," says Ritter. "The biggest risk in your ability to buy what you want to buy is how much inflation will raise the price of that item." Inflation is a hurdle investors must clear io achieve real gains. Cash investments or low-yielding bonds won't likely meet the mark, which is why it's important to have a strong representation of stocks in your portfolio, even if you're of retirement age. "There's a trade-off between the market's short-term volatility risk and inflation," says Ritter. "People often think that if they're out of the stock market they're protected. But if they get out, they expose themselves to maximum inflation risk."
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(c) 2010 Andrew Leckey