David Tepper, hedge-fund manager of the $20 billion Appaloosa Management, is nervous about the market (according to Jason Zweig’s May 16, 2014 column in the Wall Street Journal). He’s not alone. The domino effect of big time money managers expressing their worry over current market prices is enough to shake confidence and motivate sell orders by the bushel. If you are a market timer or a stock picker, your screens must be flashing all kinds of shades of red just now.
But let’s try and put all this anxiety into perspective. If you are a day trader/stock picker/market timer kind of person, you are looking to protect your gains by making decisions based on “signals”—indications, rumors, gut feelings. It is probably an uncomfortable time, but then again, if you’ve been at this for a while, you probably have your ulcer under control.
Then there are the long-term investors. Those who ride out market cycles, recessions, acts of terrorism, assassinations, IPO’s, mergers and acquisitions and whatever life throws at them. They build wealth and (sometimes) make it look easy. How do they do it? How do they survive all the craziness without falling victim to the emotions of the market?
They make peace with the market by practicing these seven habits—and so can you.
- Have enough liquid assets to provide you with security for a down market.
- Define long-term. We’re not talking 6 months here, but eight to ten years and beyond. If your goals are shorter term, your stock holdings become more and more risky.
- Be properly diversified among multiple asset classes—spread as wide a net as possible to “capture” what the market gives you. Avoid holding concentrated positions (a significant percentage of your holdings in only a few companies). Be aware of overlap in mutual funds, where different funds hold the same basic securities, hampering your diversification.
- Keep your goals in front of you. Unless you have tons of money, you probably need it to grow at a rate better than inflation and taxes (real return). If that is true, then history has shown us that investing in equities is pretty damned important over time. If you don’t focus on YOUR goals, those daily price ticks may lead you astray.
- Believe that markets are cyclical. There are times when your stomach starts to do flips when you check the markets. It might be tempting to act—perhaps sell everything and go to cash. But you don’t because you know that usually winds up to be an unfavorable decision in the long run.
- Work with an advisor who can help you make sense of it all when it comes to YOUR portfolio and YOUR goals. Make sure there is an open and full dialogue and your advisor speaks English, not jargon. If you don’t understand them, ask again—or find someone who can speak your language.
- Stop listening to people who “know” what will happen. Shut your ears and eyes to the constant barrage of noise. It’s a waste of time, energy and just makes you crazy. Focus on what you can control and let the rest go.
We are always in for trying times—it’s normal. Your mindset will determine whether you get through it in the best shape possible or whether you buy high, sell low and go into panic mode whenever the gurus speak. That’s no way to live.