Sticking to Your Plan is the Best Investment Strategy

Twenty years ago, the market was on a start-up fueled tear. Investors were chasing any stock that had a dot-com after its name. Companies were seeing their stock price double overnight. And the fear of missing out took over the market.

Ten years ago, the market was on life support. Fear gripped investors as the major stock market indices were trying to recover from a plunge of as much as 40%.

Fast forward to today. The headlines are confusing, to say the least. Full-year gross domestic product (GDP) is at a level that is stronger than the annual GDP throughout this entire 10-year bull market. Unemployment remains at or near record lows. Corporate earnings continue to pleasantly surprise.

But then there’s a messy trade war with China with no resolution in sight. Europe and other foreign economies have instituted negative interest rate policies. And the Federal Reserve is adopting a more accommodative monetary policy, which is usually a sign that the economy is weakening.

In each of these situations, the market was in a period of volatility. Despite what many investors would like to believe, volatility is a relatively normal state for the markets. However, volatility often provokes one of two responses in investors. On the one hand, they may impatiently jump from one hot investment to the next impatiently indulging their fear of missing out on the next Amazon or Netflix. On the other hand, you have investors who are too timid and their analysis paralysis leads them to play it too safe.

However, investors that tuned out the noise, stuck with their plan, and (most importantly) stayed invested in the market, have seen growth. In fact, just this year, the S&P 500 Index is up 19.71%. And consider this, in January 2000, the S&P 500 index was trading at approximately $1,400. Today, it is trading at a record high of just over $3,000. Of course, there have been ups and downs along the way. But investors who stayed the course have learned what most long-term investors know, the trend is up.

Here are four tips that many successful investors use to avoid getting off track.

Don’t Be the Greater Fool

An investment manager at one of the major investment banks acts on the advice of one of his analysts and purchases a large block of shares in Company ABC. The analyst’s prediction is correct and Company ABC’s stock price begins to rise, quickly outpacing the market. The stock draws the attention of financial news outlets and fund managers. The price continues to go up. But now, some of the initial investors are beginning to sound an alarm. The stock is becoming overvalued.

This is right about the time when the individual investor starts to jump in. The problem is that in all too many cases, these investors ignore the fundamentals and/or technical traits of the stock. They fail to assess how it fits with their risk profile. The only thing they know is that they have to have this stock in their portfolio right now. That’s usually when the bubble bursts and the stock price tumbles leaving the last investors in (i.e. the greater fools) stuck with large losses.

Invest in Things That Are On Sale

The opposite of being the greater fool is being the smart shopper. Investments don’t move in the same direction all the time. The FAANG stocks, for example, had a rough second half of 2018. Still, the trend is up. If the fundamentals still support the stock’s long-term prospects, understanding stock charts and trends allows you to “buy on the dips”.

Invest in What You Know

One symptom of paying too much attention to Wall Street instead of Main Street is the temptation to start investing in things you don’t understand. A recent example of this would be a cryptocurrency and in particular bitcoin. I’m not suggesting that it’s wrong to own cryptocurrencies. Bitcoin and Ethereum are just two of hundreds of cryptocurrencies that are changing the way businesses are raising capital and are bringing words like digital wallet and tokens into the mainstream.

But cryptocurrency is an emerging market, and investing in cryptocurrencies carries above-average risk. To invest in cryptocurrency means understanding the underlying blockchain technology that underpins the currency. It means being comfortable using cryptocurrency exchanges.  

A more generalized example is what occurred during the dot-com era of the late 1990s and early 2000s. Investors were pouring money into companies that had a business model they didn’t understand. In some cases, they were investing in start-up companies that didn’t even have a business plan.

Warren Buffett has advised investors not to invest in a business they don’t understand. If it’s good advice for Warren Buffett, it’s probably good advice for you.   

Asset Allocation and Diversification are Your Friends

The simple fact is most successful investors’ portfolios are pretty boring. They may have a small percentage of “mad money” set aside that allows them to speculate on a stock or asset that strikes their fancy. But for the most part, most successful investors have an asset allocation strategy and stick to it. They diversify their portfolio on a regular schedule and otherwise they sit back and they let the market do its work. While some people think of this as a passive strategy, it’s actually quite active and requires a disciplined approach.

When you Fail to Plan, You Plan to Fail

Spontaneity has its place in your life, but when it comes to your investments, it will usually lead to poor decisions. Investing comes down to knowing how much money you will need to achieve your goal, how long you have to achieve that goal and understanding your risk tolerance. There are some great investments that may not be right for you. At the same time, there may be times as your portfolio grows, when you will have some cash on the sidelines to use for some targeted speculation. You should always ask whether a particular investment decision will move you closer to your goals or take you further away from them. Avoiding the temptation to chase the hottest investing craze, buying stocks when they’re on sale, investing in what you know, and practicing asset allocation and diversification are great strategies to keep you on a solid path.