The most important and difficult part of long term investing is staying the course through the market ups and downs. It’s quite easy to stay the course when the market it is going up, but what about when it’s going down?
If you’ve been around any source of news, you’ve seen the carnage on Wall Street. The Dow Jones is down 15% in the last two weeks, and the pundits would have you believe the end is near.
Soon, the United States will be nothing more than a third world country and we’ll all be out of jobs. Are you scared yet??
No one seems to remember 90%+ of Americans are employed and companies aren’t doing too bad on their earnings. Things aren’t as bad as they sound right now.
Could the market keep going down? Yes. Will it go down forever? No. If it did, your retirement accounts wouldn’t matter anyway, so there’s really no point in selling now!
What you hear in the media all amounts to noise, and it’s easy to think day-trading is the way to go. When the market goes up next, the moods will quickly change.
As I commented on Twitter on Friday, “CNBC is financial porn. It’s addicting, unhealthy, and leaves you feeling unhappy after watching it all day!”
When you invest for the long term, you should turn the noise off.
As I mention in the how to invest wisely, the two most important elements of successful investing are regular contributions and time. When you contribute regularly, you’re using a term called “dollar cost averaging“. This means you invest at a set period (weekly, monthly, etc) regardless of the current market direction.
The easiest way to dollar cost average is to have the money pulled from your paycheck, and put it directly into your retirement account.
The most important part of dollar cost averaging is it’s your commitment to investing regularly, regardless of the ups and downs. If you were dollar cost averaging in March of 2009, your money has doubled since then!
Even when things seem crazy, as long as you’re investing at a risk level appropriate for your age and your portfolio is diversified, you’ll be ok.
I’m not a Financial Advisor, but some easy rules to follow for age appropriate investing are the 100 and 120 rule. The 100 rule states that you take your age, subtract it from 100, and place that percentage of your investments in stocks. The rest of the money should go into less risky assets such as bonds. For example, if you’re 30 years old, you’ll have 70% of your money in stocks, (100-70) and 30% in less risky assets.
The 120 rule is similar, but allocates more money to stocks since people are living longer. In the 120 rule, a 30 year old would have 90% (120-30) allocated to stocks. Both rules limit your exposure to stocks as you get older.
Stocks will go up and stocks will go down. As I mentioned before, from the market bottom in March 2009, stocks have nearly doubled! Who knows what will happen in the next few weeks, but the chances of the market going up in the long term are a lot better.
Even if stocks bounce around with no clear uptrend like they have since 2000, you can still do ok by dollar cost averaging since you’re buying some stock at the market lows.
The worst thing you can do is sell when things seem crazy like they do now.
I had a co-worker who came in the office in March 2009, right when things were at their worst with the stock market. He desperately said he sold all of his stocks. Almost on queue, the market hit its bottom and quickly racked up some big returns. However, my friend missed out on all of those returns because he pulled his money out.
Take ten deep breaths and stay calm. Don’t buy into all of the hype.