(BPT) - You’re familiar with the saying “If it seems too good to be true, it probably is”?
Just like any other scheme to “get rich quick,” attempting to buy low and sell high based on intermittent fluctuations in the stock market—also known as “market timing”—is almost always a losing proposition over the long term for the investor. Studies have repeatedly shown that those who attempt to align their investments with short-term fluctuations earn less than those who stay in over the long haul.
“Once again, market fluctuations are messing with average investors’ minds,” says J.D. Roth, author of “Your Money: The Missing Manual” in Entrepreneur. “They panic and sell when prices drop, then fall victim to what Alan Greenspan in 1996 called ‘irrational exuberance’ and buy when prices soar. That's a sure way to lose money.”
The truth is that even the most stellar investment advisor lacks a crystal ball into the future, and can only make recommendations based on historical research, industry guidelines, and experience. Unfortunately, past performance in the stock market is not at all an indicator of future performance.
So what are some better guidelines for investing in the stock market? Consider the following sound strategies, built on the mounds of evidence saying market timing doesn’t work as a long-term strategy:
1. Establish a long-term plan.
Set clear goals and objectives such as funding children’s college educations or investing for your own retirement. An advisor can help you evaluate risks, decide on asset allocation and set benchmarks for success while minimizing risk.
2. Use dollar-cost averaging.
Instead of trading when you think it’s the right time, the principle of dollar-cost averaging (DCA) says to invest a fixed dollar amount at predetermined intervals. The result is that you’ll end up buying fewer shares when prices are high and more shares when prices are low.
The advantage of dollar-cost averaging is that you put your money into the market earlier—increasing the likelihood of price change—rather than holding onto cash until you think prices are low. Regardless of whether you have a flat, positive, or negative price return, if your investments earn dividends, dollar-cost averaging is a useful strategy for earning dividend returns.
3. Ride the market by tracking an index and optimize your costs.
Trying to achieve alpha—i.e., beating the market with price returns—isn’t necessarily the most evidence-based way of getting the highest returns over time, especially looking at your returns net of costs and taxes.
By investing in funds that largely track a market index (index funds), historical results show that the lower fees typical of index funds and the long-term gains often outperform actively managed funds with higher fees. Investors should always focus on what they take home over the long term after fees and taxes. Looking purely at the price return can lead to lower-than-expected results.
4. Be aware of tax implications.
A major reason why investors should lean on professional support in today’s world is so that they can optimize their investments to lower taxes. Specifically, how assets are located within tax-advantaged and taxable accounts can be managed to lower your tax liability. Also, investment losses can be “harvested” via a process called “tax-loss harvesting,” and that’s generally a process many investors cannot do themselves.
Finally, any time you want to reinvest dividends or have reason to switch to a different investment, there are ways to make regular transactions as tax-efficient as possible. The same goes for making your eventual withdrawal. This kind of back-office tax work can have a major impact on how much you, as an investor, keep from your investment, so it’s important to find the right solution—whether that’s a financial advisor or learning to do it yourself.
5. Stay skeptical.
When it comes to outlasting a spike in the market, any investor should be aware of their own biases and behaviors. Pay little attention to financial TV shows and other media reports that hype short-term fluctuations. And be cognizant of the speaker’s motivation. Those who think they have a real get-rich-quick scheme are unlikely to share it with others.
Above all, don’t let uncertainty stop you from investing. If you look back all the way to 1926, keeping your money in cash/cash equivalents has underperformed both bonds and stocks. The key thing is to just get invested.
Betterment optimizes its technology and experience to help you make informed decisions in your investment strategy. Founded in 2008, the company manages $9 billion in assets. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Betterment’s charges and expenses. Betterment distributed this article through Brandpoint. Visit Betterment.com for more information.
(BPT) - We know the old saying: when it rains, it pours… and when it pours, it floods. With winter snow storms coming to an end, the threat of flooding increases as the snow begins to melt and the rivers and creeks begin to swell. It’s easy to forget about how powerfully destructive water can be. In fact, nine out of 10 natural disasters include flood, making it the number one disaster in the United States according to the National Flood Insurance Program (NFIP). However, only 15 percent of homeowners have flood insurance. From 2006 to 2015, total flood claims cost more than $1.9 billion per year and the average claim was more than $46,000 during that time.
“Even just a few inches of water can cause thousands of dollars in property damage,” says Corise Morrison, executive director of underwriting at USAA. “While it’s possible to mitigate flood damage, complete prevention is nearly impossible. If you don’t take the proper precautions, it can be devastating to your family finances.”
For most homeowners, that means looking into flood insurance. But does it make sense for everyone? As an insurance professional, Morrison has heard all the explanations. Here are some of the most common misconceptions about flood insurance:
“Flood is covered by my homeowners insurance policy.”
Typically, flooding is not covered by a homeowners insurance policy. Therefore, homeowners must purchase a separate policy through the National Flood Insurance Program (NFIP) from their insurer. If the homeowner does have flood insurance, it’s important to regularly reevaluate it to ensure it provides adequate coverage.
“Flood insurance is too expensive.”
To emphasize an earlier point, the average cost of a flood claim hovered around $46,000 from 2011 to 2015. The average annual premium for flood insurance in the U.S. is $650, according to NFIP. Do the math.
“I don’t live in a flood plain so I don’t need flood insurance.”
The Federal Emergency Management Agency found that as many as 20 percent of flood claims come from moderate-to-low risk areas. These are areas in which lenders don’t require the purchase of flood insurance. However, "less likely" doesn’t equal "no risk." Complete this quick self-survey: "Does it rain where I am?" If the answer is yes, consider flood insurance because it can flood anywhere it rains.
“Flood insurance won’t provide me with the coverage I need anyway.”
It is true that the NFIP limits coverage of a single residence to $250,000 for the structure and another $100,000 for contents to the home, but they aren’t the only source for coverage. Excess flood coverage can also be purchased above the $250,000 limit.
“I’ll just wait until it rains.”
Sorry to break this to you, but most insurers require a 30-day waiting period before a policy is effective. Unless your own forecasts rival the best science and technology have to offer, it might be wise to stick to the mantra, "better safe than sorry."
The consequences for being ill prepared for a flood can be long lasting. Research and carefully weigh the risk to you and your property. Chances are that you’ll find that it might be more reasonable than you thought. Visit USAA.com/flood for more tips and information on flood insurance and what to do before, during and after flooding occurs. You can also visit FEMA’s Flood Map Service Center for more information or to determine your flood risk.
(BPT) - As a volatile market sends ripples through the global economy, many investors are worried about how events overseas will impact their portfolio. In addition, concerns about political instability in much of the world have contributed to a heightened sense of worry and stress among investors. However, while the risks in traditional markets are real, 2016 is full of opportunities for the investor who is willing to think a little differently.
In the face of these uncertainties, the standard advice is for investors to diversify their portfolio. Many have been doing this by taking money out of their dividend-paying stocks and corporate bonds and investing in marketplace lending.
Marketplace lending platforms, sometimes called peer-to-peer (P2P) lenders, are online marketplaces that connect credit-worthy borrowers with individuals seeking investment opportunities. This gives individual investors low-cost access to high-yield consumer loans - an attractive new asset class that was previously only accessible to large institutions.
As an alternative investment strategy, investing in marketplace loans has helped investors diversify their portfolio.
Early investors discovered five secrets that are still the keys to understanding why more people are choosing to diversify their portfolios through marketplace lending. They are:
Interested in Publishing on The Money Idea?
Send your query to the Publisher today!
Get this money content for your website with our RSS Feed below!