Written by Broadridge Investor Communication Solutions, Inc. and Provided by Ken Fortuna, Financial Advisor with Waddell & Reed.
Investors can learn many lessons following a bear-market environment, especially as conditions seemingly become more bullish. Knowledge can go a long way, particularly when considering the following investment rules of thumb.
Invest with a Plan
Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s potentially could have been avoided if individual investors had created their own investment plan for achieving long-term specific goals, such as retirement or a college education. Such a strategy can serve as a reminder of investors’ goals and strategies, and can guide them through market declines while restraining them during boom times.
For some investors, this lesson can come too late. For example, panicked investors who bail out or drastically cut back in an unfavorable stock market environment may get back in only after they’re “convinced” the market is rebounding. Yet missing out on the market gains during the early stages of recovery can dramatically reduce returns — and the longer you wait, the more you could potentially lose.
Many investors chased hot tech stocks in the late 1990s and got badly burned. Investors also overloaded on company stock, frequently with poor results. By adhering to your investment policy statement, you have the potential to better manage your risk.
Hold Realistic Investment Return Expectations
As investors painfully learned, those high double-digit annual returns of the late 1990s aren’t average. Investors should look at the longer-term averages when setting their return expectations.
Avoid “Rearview Mirror” Investing
Investors tend to focus on the immediate past. When stocks are booming, investors assume they will always boom. When stocks begin to slide, they fear they will slide forever. Instead, look forward to the long term.
When you invest a specific amount in the same investment at regular intervals — a technique called dollar-cost averaging — you potentially may help reduce the risk of investing everything at market peak (the least favorable time to invest). By investing a fixed amount regularly, you buy more shares when prices are lower and fewer shares when prices are higher, potentially reducing your average cost per share.
Diversification and dollar-cost averaging do not guarantee a profit and do not protect against losses in declining markets. Since dollar-cost averaging involves continuous investment in securities regardless of fluctuations in the price levels of such securities, you also should consider your financial ability to continue investing through periods of high and low price levels. Investing is subject to market risks, and it is possible to lose money.
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation.
My goal is to make it simple and straightforward to identify and plan for your financial goals. Call, click or stop by my office today and allow me to help guide you through financial planning, investments and managing risk.
Ken Fortuna, M.B.A.
Financial Advisor at Waddell & Reed, Inc.
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