Do – Diversify your portfolio.
This may sound cliché but it is vitally important. Diversification acts as an insulator against the ups and downs of the market. If you own too much in any one company, economic sector, asset type, or country you are unnecessarily exposing yourself to additional risk. True diversification is when you own several different types of stocks (e.g. US, international, emerging market, large cap, mid cap and small cap), bonds (e.g. US, international, Floating rate, inflation protected, high yield, short term, etc.) and alternative asset classes (e.g. real estate, precious metals, oil/gas, etc.).
Don’t – Try to time the market!!!
Market timing is making investment decisions based on the expectation that the market will go up or down in the short term. An example of market timing is moving assets out of the market, because you believe the market is going to go down, with the intent of reinvesting back into the market after the downturn. One of the biggest mistakes somebody can make is trying to time the market. It is next to impossible to consistently time the market even for the most educated and talented investors in the world. There is a great deal of academic research that has shown time and time again that attempts at timing the market result in worse returns and higher risk then buy and hold strategies. Trying to time the market turns investing into gambling and I am confident most of us do not want to gamble with our retirement.
Do – Make investment decisions based on your time horizon
There are two different phases to investing for retirement, the accumulation phase and the distribution phase. During the accumulation phase, you are continually making contributions to your accounts. If the market goes down by 10% that means you are getting a 10% discount (AKA dollar cost averaging). Yes, your account value goes down as well but if you have long enough to wait, the market will recover, and you will be rewarded for your discipline and patience. The opposite is true during the distribution phase. As you are making withdrawals from your retirement accounts, you are continually selling. If the market goes down by 10%, you are selling at the lower price. The closer you get to making withdrawals from your accounts (the distribution phase) the more conservative you should be. This is a key retirement planning principal that can help your money last longer.
Don’t – Make decisions based on emotion
This practice is easier said than done. Think back to 2008 and early 2009 which were very challenging times in the market. I personally had many long conversations with my clients about not letting fear take control. Most of them listened and were rewarded for it. Let me give you an example. If you invested $100,000 in the S&P 500 at the peak of the market before the crash in July 2007 (the worst timing), held the investment until Aug 31st 2019, and reinvested dividends, you would have over $257,000. That is an average return of over 8.1% per year. Pretty good for a period of time that included one of the worst crashes US stock market history. Please don’t misunderstand me, I am not trying to say that everybody should be 100% in the stock market. All I am trying so say is that emotions cause us to make bad decisions and being aware of this fact takes you one step closer to making good decisions.
Do – Work with a professional
I highly recommend working with somebody who is a CFP® (CERTIFIED FINANCIAL PLANNER™) and/or a ChFC® (Chartered Financial Consultant®). These designations show that the advisor has advanced training, is committed to the profession and is required to do continuing education. Even if you are a do-it-yourself investor or currently have a financial advisor, why not get a second opinion from a qualified professional? You don’t have to do business with them. I personally offer a free no obligation portfolio analysis. I can’t say everybody who does the analysis becomes a client, but I can say that everybody walks away more informed afterward. If you are interested or just have questions, feel free to contact me at (517) 347-4337 or firstname.lastname@example.org.
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This article is written by Brandon Carter.