What You Need To Know About Creating Wealth in Today’s Market

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

The formula for wealth is simple: spend less than you make and invest the difference wisely. To build wealth, investors must remain unemotional, disciplined and focused on the long-term. With this in mind, here are three essential insights of investment wisdom navigating today’s markets. We hope this serves as a valuable guide as you save for retirement, a child’s education or some other important long-term goal.

Remember Your Investing Strategy

All investing wisdom has already been written. It always comes back to your strategy and not letting your irrational brain stage an emotional coup and get you to sell your investments when the markets get rocky.

Investors have a knack for piling into investments at the top and selling at the bottom. Many investors get caught up in media hype or fear and buy or sell investments at the peaks and valleys of the cycle. Active monitoring of a portfolio can be important for navigating the changing tides of the investment market but for individual investors it can be critical to manage the behavioral impulses for buying and selling that can come with following the market. 

So here’s three tips to remember when managing your portfolio:

You might ask, where is the market headed? While an important question, the short-term direction of the market is unknowable. History has shown that Wall Street’s top strategists’ average market forecasts versus the actual return for the market has been wrong every year.

This makes making investment decisions based on market predictions a fool’s game. Instead, base your investment decisions on variables that are known: your degree of diversification, your true time horizon and the amount of money you need to invest to reach your goals.

Avoid Self-Destructive Investor Behaviour

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw irrational emotion under control.” – Charles Munger, Vice-Chairman, Berkshire Hathaway

Most investors don’t receive the returns they should. Why? Human emotions. Investors sacrificed almost half of their potential return by engaging in self-destructive behaviours such as timing the market, casing hot investments, abandoning their investment plans and reflexively avoiding out-of-favour areas.

The worst investment decisions are often made when investors get too emotional. You should never allow yourself to become too attached to any investment that you make. It is critical to keep a rational mind and to only make investing decisions when you are cool, calm, and collected. This will keep you from paying too much or selling too cheaply. 

Long-term wealth is built by controlling emotions and avoiding costly mistakes. One of the most important services a trusted financial advisor can provide is to help remain disciplined, unemotional and focused on long-term financial goals.

Use a Systematic Investment Approach

A systematic investment approach involves investing money in equal amounts at regular intervals, regardless of the market environment. It works because emotions are removed from the investment decision-making process.

One example of systematic investing is an investor with $120,000 to allocate to stocks who invests $30,000 every three months for a year. Should the market drop and stocks go “on sale” more shares would automatically be purchased—precisely when many investors would be too fearful to invest.

Based on the S&P 500® Index from January 1, 2000–December 31, 2014, a systematic investor who regularly committed money every three months would have outperformed the market over this entire 15 year period. Why? By automatically making purchases even when the market fell, they took advantage of buying more shares at low prices.

A systematic investment approach may also help investors avoid selling out of stocks during market down-turns, when pessimism is pervasive.

Over the time period shown below a nervous investor who sold out of stocks at the March 2009 low would have had a poor return over the entire period. The systematic investor however, may have been more likely to stay the course, recognising that such periods are opportunities to acquire good businesses at attractive prices.

Investing without emotion is easier said than done but there are some important considerations that can keep an individual investor for chasing futile gains or overselling in panic. Understanding your own risk tolerance and the risks of the investments you invest in can be an important basis for investing decisions.

With volatile investing markets and some investors being trigger happy with whether they should buy, sell or do nothing, the bottom line is to not react, have a strategy and stick to it. Financial advice can help you clarify your goals and create a plan to achieve them. Depending on your goals and personal circumstances, there are different types of financial advice options available to suit your needs.



Related Insights