IN the world of finance, it’s easy to become overwhelmed and panic when things seem uncertain. Financial markets are ever-changing, and when we hear unreliable predictions about the market, we tend to believe them. However, acting on such predictions can lead to more harm than good. Selling your investments and putting your money into cash based on speculation can eventually cause you to miss out on potentially profitable opportunities.
Don’t Panic Based on Market Uncertainty
Knee-jerk reactions to unreliable predictions can cause more harm than good.
One reason investors should not make knee-jerk decisions based on bad news is that it leads to locking in losses. Morningstar’s latest Mind the Gap report found that investors earned about 1.7 percentage points less than the total returns their fund investments generated over 10 years through 2021. This gap between investor returns and total returns stems from poorly timed purchases and sales of fund shares, which cost investors nearly one-sixth of the return they would have earned if they had simply bought and held.
Invest in a Low-Cost, Diversified Portfolio
Striking a balance between stocks and bonds is crucial for a stable yet profitable investment.
The most reliable way to grow your money is to invest in a low-cost, broadly diversified portfolio, ignore predictions, and hang on through the inevitable ups and downs. The first step is to strike a balance between stocks and bonds. Almost everyone will want both stocks and bonds in their portfolio, the stocks for growth and the bonds for stability. In general, the more stocks, the higher the expected return and volatility, and inversely, the more bonds, the lower the expected return and volatility.
Start Early and Be Patient
Modest returns may not seem significant, but the impact can be substantial over time with regular investment.
Investment returns are more modest than generally acknowledged, particularly after inflation, which is likely to erode them by 2 to 3% a year over the long term. However, a modest 7% return can have a big impact over time, multiplying your money more than 12 times over 50 years after inflation. The trick is to start early. Many low-cost exchange-traded funds track broad baskets of stocks and bonds, making it easy for you to invest. Once you have picked out your preferred stock-bond allocation, don’t wait to get started. It’s tempting to put off investing, to rationalize that there will be a better time to buy. On the contrary, the best time to buy is during a downturn when everything is on sale.
Markets Always Recover
Although volatility should be taken seriously, a diversified portfolio will recover and generate new highs in the long run.
While it’s easy to become consumed by financial speculation and market movements, it’s important to keep in mind that markets always recover after declines and move on to new highs. There is no reason to think that a broadly diversified portfolio, including a globally diversified one, will behave differently going forward. Of course, volatility should be taken seriously, but the greater the drawdown, the greater the danger of selling in a panic and locking in losses.
Beware of Locking in Losses
Investors who make poorly timed purchases and sales of fund shares miss out on potential profits.
In an ideal world, financial experts would encourage people to invest regularly and remain invested. But let’s face it, smart investing is boring, and boring doesn’t sell. However, instead of being swayed by unreliable predictions, focus on creating a low-cost, diversified portfolio, and be patient in waiting for the markets to recover. In the long run, the returns will be worth it.
Investors must be mindful of locking in losses through poorly timed purchases and sales of fund shares. By focusing on a long-term investment strategy, investors can avoid knee-jerk reactions to unreliable market predictions and position themselves for stable and profitable returns. Investing in a low-cost, diversified portfolio that strikes a balance between stocks and bonds and starting early and being patient can yield substantial returns over time. While markets are inherently volatile, staying the course can lead to significant long-term gains.
In summary, investors should avoid making rash decisions based on market uncertainty and unreliable predictions. Instead, they should focus on developing a long-term investment strategy that involves a diversified portfolio of stocks and bonds, which can help balance risk and return. Investing in a low-cost, globally diversified portfolio, starting early, and being patient can result in significant gains over time. By staying the course and not locking in losses, investors can position themselves for success in the ever-changing world of finance.