WE MAKE A SLEW OF investment missteps: We trade too much. We read too much into the market’s short-term movements. We’re terrified of short-term losses. We think we can outsmart other investors. How can we keep these mental mistakes at bay? Consider four strategies.
First, never keep short-term money in long-term investments. If we have money we’ll need to spend soon in stocks or riskier bonds, we put ourselves in a high-pressure situation—one that’s likely to lead to panicky decisions and perhaps devastating losses.
Second, favor simple investments that are easy to understand and that offer broad diversification. Great examples are target-date retirement funds and total market index funds. While these funds will soar and sink along with the rest of the financial markets, they make investing far more palatable, because we don’t see the carnage that afflicts individual stocks and narrower market sectors, plus we’ll have the confidence that comes with holding investments we fully understand.
Third, we should keep in mind that, while a rising stock market may make us richer today, a falling market will likely leave us wealthier in the long run. To take advantage of tumbling share prices, we should rebalance our portfolios—by lightening up on conservative investments and using the proceeds to buy stocks—and we should continue to regularly add new savings to our stock portfolio.
Finally, we should always remember that, when we invest in the stock market, we aren’t buying ticker symbols and stock quotes, but rather partial ownership of real businesses. Those businesses have fundamental value that’s reflected in the assets they own, the profits they earn and the cash they return to shareholders via dividends and stock buybacks. When share prices fall, we should think like shoppers—and realize we’re getting the chance to buy these valuable businesses at discounted prices.
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