After you’ve done the heavy lifting of building your portfolio comes the next question; how are you supposed to manage your money? This is obviously a critical decision. How you manage your investments will determine your results. I know plenty of people who have done a great job saving and accumulating. But because they weren’t mindful of their investment decision process, they ended up falling short when it came to retirement. Let’s make sure that doesn’t happen to you.
Your first step in making smart investment decisions is to determine if you need long-term or short-term investments. If you are likely to spend the money within a year keep your money in very short-term instruments because they are safe and liquid. It would be great if those short-term investments did pay a decent interest rate but even if they pay nothing at all it doesn’t matter. That’s because the certainty and liquidity are far more important than the rate of return. Play it safe when it comes to short-term needs.
If you can reasonably invest for 10 years or more, long-term investments might be most appropriate. Yes there will be volatility and at times you may be uncomfortable as a result. But your focus here is growth over the long haul and it simply doesn’t matter what happens in the near-term.
Your greatest concern is what the value will be at the end of the period. Of course you’ll want to balance your growth goal with your need for peace of mind. It’s never a good idea to take on undue risks no matter what the long-term outlook is.
If you need your money within ten years you are well served by erring on the side of being conservative. Think of the earliest you may need to tap into your assets and invest accordingly. If you don’t need the money for 5 to 10 years you may want to skew the asset mix towards growth. If you need the money between 1 to 5 years you may give a heavier weight to cash equivalents and short or medium term fixed income investments in order to reduce risk.
Once you’ve determined what kind of investments to focus on your next decision is what to buy, when to buy and when to sell. This is especially important when you talk about equity growth.
There are basically three alternatives; buy and hold investing, market sensitive investing or gut feeling investing.
A buy and hold investor is someone who wants to mimic the return of the market indexes for better or for worse. This is great when the market is doing well but can be a bit harrowing when the market is on a free-fall as it was in 2008 and 2009.
A “market sensitive” investor uses objective data to guide his or her investments. Typically these data points include price performance, moving averages and volume. This can be very complicated or very straight forward.
Keep in mind that all market sensitive investors aren’t day traders. Far from it. It’s possible to use a market sensitive approach to make strategic investment decisions and upgrade your portfolio on a monthly, quarterly, semi-annual or annual basis.
Many investors who want to guard themselves against steep market declines use a market sensitive approach. Of course, the results are never guaranteed.
Both of these approaches have their pros and cons. And nobody can promise that one technique will outperform another in any given time period. The problem is that at some point investors are going to be disappointed no matter which approach they take. When that happens, some abandon their methodology altogether. They override their investing rules and allow their “gut feeling” to take control of the buy and sell decisions.
This often happens when emotions run high. When the market is doing great, some investors decide to take on more risk and become more aggressive with their funds. But when the market is at all-time highs it’s usually extremely risky to take on more risk. The contrary is also true.
When the market is a low-point the last thing you want to do is cash out but that’s what some people do. It’s understandable that people become worried when the market goes through a particularly brutal period of course. But while it’s understandable it’s also extremely expensive. In 2009 just when things looked most bleak, some investors pulled out of the market. That was just in time to miss out on one the greatest bull runs ever starting in 2009. These expensive missteps happen when people throw their investment approach out the window and rely on their feelings rather than their intellect to guide their investments.
How do you make sure this problem doesn’t infect your investing career? I can’t give you a 100% guarantee but in my experience people who prepare a financial or retirement plan tend to keep their eye on the long-term and are better able to stay on track even when the going gets tough.
That’s because they invest with their long-term goals in mind and find it easier to filter out the noise that shakes up other investors during tumultuous periods.
What kind of investment strategy are you using? What have been the benefits? What have been some of the shortfalls?