Investors Should Avoid "Great Expectations"
Apart from death and taxes, few events in our world are consistently predictable – and investment returns are definitely not one of them. What can you, as an individual investor, do to cope with the ups and downs of the financial markets and make progress toward your long-term goals?
To begin with, you should be aware that the financial markets have fluctuated greatly – daily, monthly and yearly – over the past three decades.
Overall, though, the financial markets trended upward, as measured by major indexes such as the Dow Jones Industrial Average and the S & P 500. Of course, as you’ve no doubt heard, past performance can’t guarantee future results.
What was responsible for this long upturn? Most experts cite several factors: sharp declines in inflation and interest rates, vastly improved worker productivity (largely brought on, for at least a few years, by more advanced and efficient information technology), growth in emerging markets and a long run of strong corporate profits. Can a generally positive investment environment continue in the years ahead? As mentioned above, it’s pretty hard to forecast the performance of the financial markets. And you can be fairly certain that the market volatility we’ve seen – those large price swings – will not disappear any time soon.
So to help position yourself to better withstand these sharp movements, consider the following: Modify your expectations. Don’t count on high or even positive returns throughout all your years of investing. Try to “bake in” reasonable return expectations to your long-term investment strategy. A financial professional may be able to help you with this.
Don’t make rash moves to “beat the market.” If the market doesn’t consistently yield double-digit returns, you might think that you need to take drastic actions, such as investing much more aggressively than your risk tolerance would normally allow. For example, you might be tempted to pursue some “hot” stocks that you heard about through a friend, co-worker, or one of the so-called experts on the cable television shows devoted to investing. But by the time you hear about these stocks, they may not be so “hot” anymore – and they may never have been so hot for you, given your individual needs, goals and risk tolerance. So, instead of ratcheting up the aggressiveness with which you invest, look for other investment techniques to help yourself advance toward your financial objectives.
Boost your investments in your retirement plans. Contribute as much as you can afford to your 401(k), IRA and other retirement accounts. The earlier you start, the more years you’ll be giving your investments to potentially grow. Be open to working longer. If you like your job, and you’re prepared to be flexible, you could gain some key benefits by working just a few more years than you had planned. Specifically, you can keep contributing to your 401(k) and IRA, and you also might be able to delay taking Social Security, thereby earning bigger monthly payments when you do start collecting your benefits.
Investing would be simple if you could always count on earning big returns.
However, that’s not the case. And if the markets are indeed going to be somewhat unpredictable, then you’ll want to take a page out of the Boy Scouts’ handbook and “be prepared.”