Most of us don't have a whole lot of disposable income to blow on stocks, so it's understandable if you don't actually know how investments work. But, for those who are looking to better manage their money in 2018 and beyond, we're here to help with not only sticking to a plan, but carrying it out in order to see some reward.
For a number of reasons, the stock market fluctuates. From the scary threat of something major happening to talking heads on TV and other media outlets warning that things might go south with a particular company, we have a lot of distractions that could lead to monetary anxiety, causing us to make a drastic decision before it's necessary.
Fear not, guys, because we spoke with Jason Labrum, founder and president of Labrum Wealth Management and author of the upcoming book Financial Detox: How to Steer Clear of Toxic Advice, Achieve Financial Independence and Manage Your Wealth for Maximum Impact, to help answer some questions about how investments work. He also provides key advice in order to protect your investments and remain patient in order to make some serious money.
Added Jason: “With the growth of the Internet, social media and TV, investors are constantly tempted to lose focus on what they can control and instead focus on things out of their control. You shouldn’t change what you’re doing just because of current events. I often tell my clients, ‘I forbid you to freak out and stress out about the market. Turn off the news, turn off the TV and go enjoy the aspects of your life you work so hard for; family, friends and your passions.’ ”
The investment returns that the market delivers can be phenomenal if you stay focused, Labrum says. The problem: Investors react to media hype and make behavioral blunders based on emotional decisions rather than fact-based reality. “One key factor in investment success is learning how to maintain discipline and stick to the goal oriented financial and investment plan that is created for them,” he says.
Know Your Volatility Tolerance
It’s important to understand your tolerance for volatility when you’re building your portfolio. “Volatility is not necessarily risk; it’s an expected part of investing,” Labrum says. “However, your behavior can turn volatility into risk if you make decisions based on fear or panic.” If your goal is simply to save for retirement, and you would rather avoid the stress of watching market swings, then a strategy with a 5 percent volatility portfolio may be perfect, he says. If you have more ambitious goals (such as leaving money to heirs or giving to charity), and volatility doesn’t give you the jitters, then a higher percentage of volatility may be appropriate. The key is to find a balance that allows you to achieve your financial goals, but at a level of volatility you’re comfortable with.
Listen To Your Advisor
People are prone to make emotional decisions with their investments. A good advisor, preferably a fiduciary advisor, should be able to help you avoid acting rashly and maintain the discipline you need to be a successful investor, Labrum says. The fiduciary advisor should be able to look at the situation without the impassioned bias you bring to it, and help you make sure you don’t panic and that you stick to your financial plan.
OK, So The Market's Down And I'm Nervous About My ROI, Is There A Standard Rule As To Waiting Before Selling? (30 Days? Three Months?)
DON’T SELL! Times are good and the market has been on a long bull run. Now is the time to make sure you have a diversified allocation that fits your goals and objectives. No one can accurately and repeatedly time the market with any accuracy, therefore setting an arbitrary sell guideline will ultimately cause you to make a behavioral blunder which can and will detract from your long term returns.
Any Predictions On What Companies/Stocks To Keep An Eye On This Year?
Keeping an eye out for one particular stock or company can be a detriment to your long term returns. As an alternative, consider low cost broad market funds or ETF’s. Our firm prefers funds or ETF’s which are fundamentally weighted or factor based. Meaning the underlying holdings of the fund or ETF are weighted based upon the characteristics of the securities as opposed to traditional capitalization weighting. This will give you broad market exposure and reduce systematic risk. In addition the largest percentage of your portfolio will consist of the strongest fundamental stocks. Trying to pick individual stocks is a loser’s game versus being broadly diversified across the market.
What's The One Tip You'd Give For Making Money On Investments In 2018?
Get diversified. The majority of Americans have way too much of their portfolios allocated to U.S., particularly U.S. large cap stocks. 2017 was the year that worked well for such concentration. As an example looking at the FANG stocks (Facebook, Apple Netflix, Google) which were parabolic in 2017.
One common myth is that active money management or stock picking does better in down markets than broad market or passive investing. And a myth is precisely what that is, again statistics will show stock picking and active money management fails to outperform the broad market and passive money management. A well diversified equity portfolio might look something like this: 65 percent U.S. of which 35 percent is large cap, 15 percent mid cap and 15 percent small cap. Developed International would be 25 percent (of which 15 percent is large cap and 10 percent is mid and small cap), and lastly 10 percent emerging markets.
In summary, focus on the things you can control and ignore those that you can’t. You can control diversification, cost, turnover, and discipline. Those are investment principles which will yield significantly better results than timing the market, stock selection, and allowing emotions to dictate investment decisions.
Lead image via Getty.