When it comes to investing, people are either investors or speculators. An investor who is committed to saving generally uses a long-term strategy to build up financial security. He does this through the consistent purchase of investments that are well-diversified.
A market timer or speculator is not so concerned about consistency but treats investing more like a gamble – investing in stocks like some people play Monopoly®. While it is easy to be termed as a “long-term” investor during a bull market, you can easily change your mind when a bear market predominates the economy.
Are You a Market Timer?
If you are a market timer then, you, no doubt, follow a fairly predictable cycle of investing. When the prices in the market are low in relation to the historical norm, you tend to make a purchase. When an investment’s value is peaking, then you sell a holding. The cycle continues to be repeated, with each buy based on future stock tips.
When you look at this approach to trading in theory, it appears to be practical. However, this type of “investment” usually will not work. Even if you are a sophisticated investor, or someone who is experienced in buying and selling stocks, you cannot solely place your confidence into the whims of the marketplace.
If you are a market timer rather than a long-term investor then, you can frequently become misled by such emotional factors as fear or greed. As a result, you might end up selling a stock, fearing you will lose money. or acquire a stock purchase at the end of a rally.
Look at Your Current Financial Situation
Unfortunately, most market rallies happen inconsistently. Therefore, if you use this type of strategy, your timing has to be almost perfect. To avoid falling haphazardly into a speculator’s trap then, think about your own long-term objectives instead. Concentrate on your financial circumstances, not the daily ups and downs of the stock market to be your guide.
By concentrating on your individual financial needs and adhering to an investment plan, you can make the most from market ups and downs. For instance, a sound long-term strategy for investing normally includes investments that are made at consistent intervals. If you maintain this type of schedule during a dip in the market, you can end up buying some stocks at an attractive price.
Of course, just because you switch investments during a volatile market does not always mean you are a speculator by nature. Making the change may also be a tactical decision, especially if the alterations are related to your long-term objectives.
He says, “. . . [A]ll of us would be better investors if we just made fewer decisions.” Remember the rule of the financial great, Warren Buffet – “Buy and never sell.” Again, heavy trading is not something that makes an investor a lot of money.
Cut Down on Portfolio Changes
Cutting down in active buying and selling also includes reducing the time spent on rebalancing your portfolio. Research demonstrates that risks increase with frequent rebalancing, actually lowering the return on most portfolios. Experts suggest that investors rebalance their portfolios by adding savings or new money.
In addition, research by Morningstar shows that many fund investors are not good in timing their investments. According to the data, investors often jump in late and high and hit the panic button by selling when a stock’s price is rock bottom. According to the research, rational investors take just the opposite approach.
Unfortunately, a great number of people in the U.S. have portfolios whose worth is about $50,000 – not really enough to build an ideal nest egg for retirement. However, if you think you can catch up quickly by taking more trading risks, think again. According to the above research findings, that simply is not possible.
A Recommended Investment for New and Seasoned Investors
When you review the research, the results indicate that around 4 out of 5 people are making irrational decisions when it comes to investing. To encourage, investment growth then, it may be best, especially, if you are a market timer, to invest in an index-fund portfolio.
Definitively, an index fund is a type of mutual fund whose portfolio is designed to track or match the elements of a market index, such as the S&P 500. The fund is known to provide a wide exposure to the marketplace as well as a low portfolio turnover.
After all, investors need not be aggressive, just committed, to making their money grow. A low-cost index fund is a common sense strategy that allows an investor to make the most of the market ups and downs.
A classic index fund is usually diversified. As a result, you are putting your money in several kinds of stocks. The fund also costs less to manage. Therefore, the diversity lowers risk, and the fund is easier to afford. Just make sure, when making a selection, you choose a fund whose management fees don’t swallow up any earnings. If you want to acclimate yourself to the stock market and realize a return on your investment at the same time, an index fund might be the ideal investment approach.
While you don’t have to choose to invest in an index fund, you can still take the wisdom of astute investors, such as Warren Buffett, seriously. An index fund is just a good choice if you want to reduce your potential for risk and establish a reliable investment plan – one that you can maintain for both short-term and long-term financial objectives and goals.
So instead of using market timing as an approach, invest in the present and future by making your money grow. Review your investment portfolio and contrast it with both short-term and long-term investment goals. For example, will you need to make a withdrawal within the next year to start financing your retirement? Maybe you will need to use the money for a specific lifestyle change. If that is the case for you, you may want to readjust your portfolio so it represents a more conservative asset mix.
Take a Careful Look at Your Long-term Financial Goals
Also, carefully review your long-term financial goals. Short-term market fluctuations normally do impact an investor’s long-term plans. Therefore, it may be prudent to stick with your present strategy. People have different investment goals when they are young, nearing retirement and in retirement. Therefore, you need to make certain adjustments during each investment stage.
While you may be more interested in being more aggressive in your younger years, you will usually choose more conservative stock choices when you are older. The whole idea is to build up your money and make it work for you. Market timing may give you some short-term rewards but it can also term you as more of a speculator than an investor. If you want to build a portfolio, you have to learn patience as well as the strategies you will need to make your money and holdings grow over time.
That means you have to develop the proper mindset about investing and look where you are positioned on the rationality scale. If you want to invest for the future or for your retirement, you need to know how to view investing overall.
Have a money management plan. Don’t blow everything you make just because your investments are going well. Next thing you know you’re apply for loans for bad credit and you find yourself back at square one. Once you have a plan and get ahead make sure you stay there, be smart.
Avoid Being Overconfident
One of the characteristics you don’t want to acquire as an investor is overconfidence. You don’t want to be overconfident in your approach as this kind of attitude can also cause you to overestimate your expertise and underestimate the potential for risk. Overconfidence often causes the investor to make mistakes that lead to financial losses that are hard to recoup.
If you believe you are an above-average investor, you are not alone as research shows that 75% of investors think this way. However, according to studies conducted by one Boston research group, the “average” investor, it was found, under performs in the market and reaps after-tax returns that are less than the rate of inflation. Therefore, you want to tread carefully when making investment decisions and use a more passive approach.
Be Passive in Your Approach
In fact, one finding supported this idea as it showed that the more people trade, the less they earn. The study, which involved about 66,000 Wall Street investment accounts, showed that passive investors (with a 2% yearly turnover) beat active investors (with a 258% yearly turnover) by half in gains. Daniel Kahneman, who is a psychologist and the winner of a Nobel Prize in Economics, stresses conservatism in investments.