(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) - There is great unrest in the financial universe. The next disturbance in The Force is anyone's guess. Like the rebels in the forthcoming Star Wars film Rogue One, you seek a new hope. Fear not and reach for a promising investment future.
I. Look to the setting suns.
In Episode IV: A New Hope, a moisture farmer named Luke Skywalker contemplates his future as two suns set. Great challenges loom ahead. Preparations are critical. The same is true of your financial future. Do you have an emergency fund? Are you on track for retirement?
TIP: You must be looking now to see what can happen later.
II. The Force will be with you, always.
The keys to investing success lie inside you-though you shouldn't go it alone. Envision what you'll encounter. Create a strategy to meet those demands. Ask yourself:
* How much can I contribute
* In which areas?
* What does victory look like?
* When will objectives be met?
When fear for the future emerges, seek advice. In Star Wars, Jedi knights guide apprentices. All lean on master Yoda.
TIP: Navigate challenging times with an advisor or representative at your financial institution.
Before dangerous missions in Star Wars, the rebels convene. Strategy is detailed. Difficult questions are asked. Consensus is reached. Regarding your investment plan, perhaps it's time to re-evaluate your budget and increase monthly contributions to your portfolio.
"Schedule time on a quarterly basis to review your portfolio's performance," says Kevin Driscoll, vice president of advisory services at Navy Federal Financial Group. "It's a great idea to involve your financial advisor in this process. A second opinion can provide perspective and help you identify areas for improvement."TIP: Plans tend to impact others, so be sure to communicate and collaborate.
IV. Diversify your attack.
An effective strategy in battle employs multiple fronts. In Star Wars, missions combine air and ground tactics. Investing also incorporates "divide and conquer." Experts recommend investing in diverse assets: stocks, bonds, certificates, real estate and more.
TIP: To diversify your portfolio, invest in stocks and bonds across a variety of business sectors.
V. Stay in formation.
Your portfolio will be tested. Be mindful. In Star Wars, Jedi are trained to draw close to each other when threatened. Remember no matter how poorly an investment is performing, history shows the market corrects with time.
"When the market dips, purchase more shares with the same dollar amount. When the market spikes, your owned shares increase in value," Driscoll explains. This investing method is called dollar-cost averaging. It lowers the average cost of shares over time.
TIP: Avoid watching the market too closely. Resist the urge to bail on an asset. Invest consistently, with the long view in mind.
VI. Don't go rogue.
In Star Wars, The Empire has built a vast portfolio of assets on Darth Vader's watch. He offers enticing rewards to bounty hunters who support his regime. Your mission in financial planning is to resist the ever-present temptation to go rogue. Don't be seduced by others' success. Don't jump when a friend asks you to invest in his can't-miss venture (unless his goals align with yours).
TIP: Record your investment plan in writing, which firms up the details. When tested, fall back on the document.
VII. The saga will have many episodes.
Despite your best intentions, some investments will succumb to the dark side of market forces. Remember investing takes patience and fortitude. Like most journeys, the story of your portfolio won't be told in a single chapter.
TIP: Avoid making an investment decision when your emotions run hot or cold.
If there's an example in Star Wars of what not to do in investing, it's Han Solo. He didn't believe in market forces (at first). At times, he struggled to manage obstacles. As we saw in Episode VII: The Force Awakens (and as early as Episode IV: A New Hope), Han didn't take debt seriously. Collectors were after him at every turn. In Episode VI: The Empire Strikes Back, his assets were frozen. Your destiny can be simpler. You don't have to be a swash-buckling smuggler. A moisture farmer from a remote desert outpost can make sound financial decisions toward prosperity.
Navigating Volatile Markets for a Secure Retirement
(Family Features) Persistent and significant stock market swings, combined with shifting workplace structures and an outdated retirement benefit system, are profoundly impacting Americans’ ability to save and prepare for a secure retirement.
In fact, a quarter of Americans age 50 and over exhausted all of their savings during the 2008 recession, according to a recent AARP Public Policy Institute report. And, at the same time, almost one-third of older Americans said their home declined in value, meaning they could no longer count on rising home values to help fund their retirement.
In order to protect your nest egg against market volatility, experts recommend ensuring you have a balanced financial portfolio that includes conservative, low-risk products that are less impacted by stock market volatility.
“The single most important step Americans can take to mitigate risk is to diversify their portfolios,” said Jim Poolman, Executive Director of the Indexed Annuity Leadership Council. “Sitting with a financial planner and using a retirement calculator can help you determine where you are, where you want to be and what savings vehicles can help you get there.”
While there are no surefire ways to avoid the effects of stock market instability, there are some things you can do to reduce the likelihood that you will suffer the consequences in the future, and things you can do during a market downturn.
Start saving now. Many people are focused on paying down student loans and other debt, or concentrating on more immediate goals like buying a house and children’s college funds. However, the cost of putting off retirement savings adds up. Every six years you wait to start saving, the monthly amount you need to save to reach the same retirement income doubles.
Avoid putting all of your assets into one type of account. While contributing to an employer’s 401(k) is a terrific start, it’s often not enough. To build a solid retirement plan, don’t underestimate the importance of a balanced financial portfolio. Your level of risk should reflect your age and your retirement goals. For example, younger savers have more time to recover from risk than those nearing retirement. One option to provide balance to your retirement portfolio is adding a Fixed Indexed Annuity, which protects your principal and can provide a guaranteed stream of income in retirement, regardless of market ups and downs.
Create a retirement plan based on actual needs. A study by the Employee Benefit Research Institute found 39 percent of people guess how much they will need to save without actually calculating their retirement needs. Using calculators can help determine your specific retirement income needs so that you can plan accordingly. Calculating just your living costs isn’t enough – also take into account rising healthcare costs, inflation and longer lifespans.
Monitor and adjust your savings strategy. Volatility in the stock market can affect your savings, as do your current expenses and future needs. Additionally, career changes and family situations can change how you should be saving. Leading up to retirement, your last few years of savings will be different than when you were first starting out in your career. A good rule of thumb is to spend five minutes every five years revisiting your retirement plan to make sure your savings reflect your needs and adjust for market conditions.
Learn more about options for managing your retirement account at FIAinsights.org.
Photo courtesy of Getty Images
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