7 tips for successful investing
Joel Dresang: Marc, there’s plenty of research that shows that successful investing involves not clairvoyance so much as discipline. You’ve made a list of seven common mistakes that investors make.
One of them has to do with diversification, and that’s a role that you play. You help people make sure that they have the proper asset allocation.
Marc Amateis: Right, Joel. Don’t put all your eggs in one basket. That’s how you control risk for the most part, making sure you have a well-diversified portfolio – stocks, bonds, growth stocks, value stocks, some international. Watch your bond duration and credit quality.
That’s how you make sure that you can survive all the ups and downs that the markets inevitably are going to bring.
Joel: And you point out that allocation does not include jumping on the bandwagon of the latest hot stock or hot mutual fund.
Marc: Right. Don’t chase performance.
Just because something has been up recently, in the last year, let’s say, doesn’t mean it’s going to lead the markets or be up the next year. And we see this a lot.
Investors tend to look at recent performance of a stock or a mutual fund and want to put more money into it because of that. Often times, you should be doing just the opposite. Perhaps that investment has run up, it’s fully valued, and now you maybe want to start moving some money out of that and into something that’s a better value.
Joel: Marc, studies show that 90% of the variability in portfolio performance is based on that asset allocation, not stock selection and not market timing. In fact, that’s one of your points. It’s not so much timing the market as it is time in the market.
Marc: That’s correct, Joel. You’ll want to stay invested.
A lot of people think that they’ll know when the market’s going to go down, and they’ll get out. Or they know when it’s going to go up, and they’ll get in, and that’s a losing proposition.
Nobody knows that, and invariably, what really happens is somebody waits because they think the market’s going to go down, and now it goes up, and now they feel like they’ve missed out, but they don’t want to get in because it’s already gone up. Or the market goes down, and they don’t want to get in because they think it’s going to keep going down.
So, don’t do that. Stay invested, make a plan, and that’s how you’re going to succeed over the long run.
Joel: And everyone knows that you try to buy low and sell high, but you have a warning about trying to guess when that low point is.
Marc: That’s right, and don’t confuse price with value.
If a stock has gone down in price, it doesn’t mean it’s a good value. It can easily continue to go lower and lower. In the business, we call that trying to catch a falling knife.
You’re much better off looking at a stock or a mutual fund and, with an advisor’s help, determining if that’s a good value or not, regardless of its current price. Just because something has gone up in price doesn’t mean it won’t continue to go up in price.
So, look for value. Don’t just focus in on a price.
Joel: Your fifth point is that investors should consider their time horizon.
Marc: Right. Very important to know what your time horizon is when you’re investing.
If you’re putting money in the stock market, that’s not where shorter-term money should be. The last thing you want is to need that money and the stock market is down 10%-15%, and now you have to pull out at a loss.
So, you need a well-diversified portfolio that has stocks, bonds, different investments for different time frames, and allocate your portfolio accordingly. That way, you’re never going to be caught needing money in the shorter term, with something that really is long-term money.
Joel: And that’s a reminder that investing isn’t one size fits all. I hear a lot of talk around here about risk.
Marc: Every investor needs to know their own risk tolerance and invest accordingly. I tell clients all the time, “If you can’t sleep at night, you’ve got too much money in the stock market.” I don’t care what it is.
Because, invariably, if you’re emotional about your investments, if you’re watching them every day, if you’re concerned when they go down, you’re going to make a bad emotional decision. And the last thing you want to do when you’re investing is make an emotional decision.
Your investment decisions should be based on facts, should be based on value, should be based on fundamentals, not emotion.
Joel: One way of guarding against getting too emotional about your decision-making is just to tune out distractions.
Marc: With so much information coming at you all the time, be it through the financial media or whatever, it’s real easy to get caught up in the minute-to-minute, day-to-day gyrations in the financial markets. That’s not how you become a successful investor.
Talking Money: Allocation, a Money Talk Video with Kyle Tetting
Avoid rearview mirror investing, a Money Talk Video with Steve Giles
Risk: How much can you stand? How much do you need?, a Money Talk Video with Isabelle Wiemero
You want to make a plan, stick to that plan, and tune out all the outside noise.
You can always make changes to an investment plan based on your own personal circumstances and changes in your life, but turn off the TV, put down the newspaper, make your decisions based on fundamentals, and you’ll be a much better investor. You’ll sleep better at night, too.
(initially posted Feb. 2, 2017)