Think of the hours spent watching the ticker symbols swim across the screen. Consider the time devoted to listening and reacting to the pundits and “experts” who predict what will happen next. Calculate the attention given to reading the columns of advice aimed at convincing you what stock or fund to buy or sell. Imagine all that time freely given in an effort to be “in the know,” have an economic advantage, be better informed and have an edge on everyone else (except for those who are watching the same noise, of course). Needless to say, it’s a lot of time, attention and human resource—all of which are actually devoted to nothing.
Why nothing? Simple. Investing, not speculating, is a long-term strategy—and by long, we’re talking seven or more years. “Long-term” doesn’t mean a day, a week, a month or even a year! The shorter the time period, the greater the risk and the more it becomes gambling. You might be a winner, but the odds are certainly not in your favor. So why spend all this precious time watching something that is of little or no value? For some, it is the thrill of the game, just like political junkies crave their fix of “information” and can’t turn off Fox News or MSNBC. For others, it’s just a habit, something they’ve always done or something their parents did. But honestly, it’s mostly all useless noise wrapped in Wall Street’s self-promoted allure of wealth and success.
Research has clearly shown that stock picking and market timing are rarely successful strategies with any level of consistency. Yes, there are those who are lucky enough to pick a really good stock and those who are lucky enough to buy or sell at the “right” time, but these successes are few and far between for the average investor. However, the part of our brain that is convinced it is smarter than the market will still keep trying to out-think that which is not out-thinkable. Then there are those who were lucky enough to pick a great stock and buy it on a timely basis, but when it comes to when to sell or take profits off the table, they become mired in greed. They will more than likely hold too long and watch their winnings fade.
A sound long-term strategy for investing consists of two main themes:
allocation and diversification. In other words, it’s about where you spread the risk and how much of your hard-earned dollars go into risky versus Safer investments. The fewer stocks you hold, the greater the upside and downside risk. By focusing only on the upside, you’re liable to take greater risk—but, it’s the downside that’ll kill ya!
Take an investment of $1,000 that is up 10% the first year, down 10% the next year, and up 10% the year after. Your $1,000 is now worth $1,089, up slightly less than 3%. Another investment of $1,000 that is up 15% the first year, down 20% the next year, and up 15% the year after is now worth $1,058. Clearly, the impact of volatility plays a significant role in your financial outcome.
Regardless of the pundits and experts, volatility happens. How many foresaw oil prices plummeting and the impact on the market in the short term? Chances are, before you blink, some other news or situation will occur that will cause the market to climb or falter. By the time it hits the wires, it’s too late to do anything meaningful. In other words, the market will react to news and factor that into current pricing. Read this to mean: You are not smarter than the market!
Let’s get back to time. Now that you’ve been rehabilitated and are channeling your time and energy away from the noise of Wall Street and the media’s hysteria, what can you do with that time that will give your life real meaning?