Investing might seem easy. Know some excellent rules, choose wisely among your many options, put everything on “automatic pilot,” and then wait (and wait some more) to get the results you desire.
But in real life, investing is tough for human beings who have fears and desires and other emotional reactions. (Hint: That’s all of us.)
This makes it really difficult to “do the right things” with money we’ve set aside for the future.
Here are seven of the hardest hurdles that investors must somehow get past.
In every case, there’s one fundamental problem that has no solution: We don’t know the future, and we can’t know the future.
Tough decision No. 1: Spend money or save it?
We know we should save money for the future. But there’s no end of other things that demand our money. When we’re young, we may be setting up households, raising young kids, paying student loans — all while we are pretty sure we are nowhere near the peak of our earnings.
When we’re in our middle years, we may be sending kids to college. When we’re close to retirement, perhaps the nest is empty and we can finally take the time to travel and pursue some long-postponed dreams.
Essentially the whole world wants us to spend, and easy credit is dangled before our eyes everywhere we look.
It’s never easy. But the “right thing” is to follow the old rule to “pay yourself first.” In this case, “yourself” means your future self who is going to want or need to retire.
Tough decision No. 2: Should you invest in stocks and risk losing the precious money you have set aside instead of spending it on what you want and need?
Anyone who’s even semiliterate about investing in equities knows that some losses are inevitable.
It’s even worse for people who believe they are personally so unlucky that whatever they do is very likely to be wrong.
The “right thing to do” is to diversify widely in asset classes that have strong long-term performance records — and then do your best to ignore the inevitable short-term ups and downs.
When he was becoming one of the first “Microsoft
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millionaires” several decades ago, Bill Gates once told a reporter that he looked at the company’s stock price only about once a month. He had the right idea.
Tough decision No. 3: Should you sell — or keep — and investment that has ‘failed’ you?
This is a big worry to many people partly because they don’t have any objective nonemotional way to know when an investment has “failed” them.
Let’s say that mutual fund (or heaven forbid, that individual stock) you bought is suddenly down by 25% or 30%. What should you do?
Some investors establish an “I’ll cut my loss” discipline after a certain percentage drop. Others might adopt a plan of “I’ll buy more” on the theory that the price has become a bargain.
Each of these approaches is logical and rational. But which is the right thing to do? You can’t know, because you can’t know the future.
Tough decision No. 4: Should you invest when the market has been going up?
Rising stock prices mean every dollar buys you a little less than it did previously.
A rising market may be a trend that will continue. But how will you know when the trend has run its course and is about to reverse direction, when it’s time to sell?
The simple answer is: You won’t know that until it’s too late to do something about it.
Tough decision No. 5: Should you invest when the market has been going down?
Objectively, this is the best time to invest as long as you have faith in the long-term. Yet falling markets erode that faith.
And there’s that “trend” thing again. If the market keeps falling, you will have even more favorable buying opportunities later — but you may also have less and less reason for long-term faith.
And every day that you watch your new “bargain” investment fall in value, you’ll have more reason to doubt yourself.
Decisions 3, 4 and 5 can be applied to the question of whether you should sell, too. The answers aren’t any more obvious.
The problem is the same: You don’t know the future, so you can’t be certain of the results of whatever you do.
These dilemmas concern timing of purchases and sales. Lots of salespeople and pundits will tell you they know where the market is going in the short or the medium term. But they don’t, because they can’t.
That’s the bad news about timing. The good news, however, actually is pretty good indeed.
Good news part 1: We have reliable data, going back in some cases more than 90 years, indicating that the long-term trend of the stock market is up.
Despite what sometimes seem like insurmountable problems we are facing, I believe that long-term trend will continue.
Good news part 2: If you’re investing for the long term, you can short-circuit all those pesky buy and sell decisions by following one extremely simple formula:
The time to buy is when you have the money to do so. The time to sell is when you need the money.
That won’t guarantee you the best prices on either end. But it will relieve you of a great deal of hand-wringing and worry about what to do.
Here are two more tough investment decisions, each of which deserves more space than I can give it here.
Tough decision No. 6: Should you try to beat the market by hiring smart, hardworking managers who say they have the research, the computer skills, and the brains to beat the market and get better-than-average? Or should you settle for “average” market returns by investing in index funds?
The right answer might surprise you.
“Average” is a really tough sell in our society. Exceptional brains and tools, combined with lots of hard work, are regarded as the surest path to success.
But when it comes to investing, that bit of conventional wisdom is dead wrong.
The well-documented reality is that far too many investors shoot themselves in the foot trying to beat the market
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Largely because of their own behavior, the majority of investors wind up with returns that fail to even match the market, let alone beat it.
An index fund will capture the return of the market — and that will make you an above-average investor.
Beating the market is the wrong objective. Much better: Seek either the lowest-risk way to meet your needs, or the highest return you can reasonably expect within your risk tolerance.
Tough decision No. 7: Should you keep up on financial news or ignore it?
The financial media constantly bombard readers, viewers and listeners with news, information and commentary.
Read: Retirees: Stop paying attention to the markets
Much of it is contradictory. In any given week you can find plenty of commentary that might paint a bright financial future and make you confident. And in the same week you can find commentators painting a dark picture and urging great caution.
I have known far too many people who got so upset by the financial news that they abandoned their carefully laid plans to try to protect themselves from some imaginary boogeyman.
Often, the best answer is simple: Turn off the TV.
When you can’t control the future and you can’t even know it, there are better uses for your time and energy.
For more smart investing tips, check out my latest podcast. It’s called “What to do with Vanguard’s 1,800 commission-free ETFs.”
Richard Buck contributed to this article.
Source : MTV
