It’s a fact: Emotional investing doesn’t pay, it costs. Market study after market study has clearly proved that when investors are driven by emotions – jumping into and out of stocks looking for the next winner, pouring money into mutual funds following a period of strong market growth, and then moving to the next ‘hot’ asset class during market troughs – they often lose, and sometimes lose big.
Here’s an example: In 1999, the Canadian equities market jumped a spectacular 31.7 per cent, prompting a lot of investors to hop on board in the year 2000. Over the next two years, the market went negative, declining by over 12% in each of those two years and many of those ‘heat seeking’ investors bailed out. So, not only did they miss the big jump of 1999, they also absorbed large losses when they cashed out. However, had those investors stayed invested for the entire 1999-2007 period they would have enjoyed overall returns of close to 30 per cent.*
And that brings us to one of the prime rules for investing success: Trying to time the market or a stock almost never works. But time in the market does by delivering better overall returns – especially when you couple your long-term stay the course strategy with:
Effective asset allocation Markets are always volatile to some degree or another – it’s in their nature – but with a carefully selected and properly diversified ‘mix’ of assets, you can effectively reduce risk, and enhance your chances of achieving your long-term goals.
Dollar cost averaging This is the strategy of buying a stock or fund on a regular basis, at an amount you can afford, regardless of the stock or fund price. It is a systematic buying approach that saves you from trying to time the market, averages out the price of your stock or mutual fund units, and ensures you are always participating in the market so you will never miss out on periods of excellent returns.
When you invest with reason instead of emotion and wrap other effective strategies around the ones introduced here – such as investing according to your tolerance for risk, achieving instant diversification through a portfolio mutual fund, and dollar cost averaging to eliminate any concerns you may have as to when the right time to invest is – you will be well on the road to financial success, regardless of short-term market or economic downturns. Your professional advisor can make sure your investing strategies are right for your personal needs, expectations and goals.
*Source: Investor Economics as cited in Managing Emotions When Investing, Investors Group Inc. 2008