Do control freaks make bad investors?
You can't control the market, only your response to it.
While the markets have a life of their own, that doesn’t mean every aspect of financial planningCredit: Image: David Castillo Dominici / FreeDigitalPhotos.net is out of your control. The two most important parts of investing - making a plan and sticking with it - are within your control.
News about the volatile dollar and the sinking stock market can be debilitating. Try to focus on what you have control over: asset allocation, scheduled savings and taking maximum advantage of tax-free saving programs. If you initially had a reason for investing in various funds/stocks, as long as the fundamentals haven’t strayed from your original reason, hold tight and wait for better times. Though past performance is no guarantee of future returns, those people who have held on have often done well with their investments.
Remember, your total return is mainly based on asset allocation, not individual investments. In other words, the kinds of investment you choose (what percent you put in stocks, bonds, and cash) may be a more important choice than the specific investments themselves (whether you chose stock A or stock B). In today’s global economy, there are many opportunities for diversification, and common wisdom holds that you shouldn’t put all your eggs into one basket.
If you’re saving a fixed sum of money on a regular basis, sometimes you’ll buy stocks high and sometimes low. This strategy of dollar-cost averaging (regularly buying regardless of the particular price) can help to mitigate against severe market fluctuations.
Taking advantage of tax-free saving programs lets your hard-earned money work for the future. Letting your funds grow tax-free enables compound interest to work harder.
When the markets take a spin, your spirits don’t necessarily need to dive, too. If you are a long-term investor with a properly balanced portfolio, you should be able to weather surprises. And if you don’t have the time to regain potential losses, consider rebalancing your portfolio to minimize your exposure to risk. As an investor, you should be the one in control of your portfolio, not the market.
To find out more about asset allocation, read Risk Tolerance and the Art of Tactical Asset Allocation.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.