Disciplined investing begins with keeping that anxiety in check. If youre interested in long-term gains, you need to gird yourself during the short-term bumps and focus on the future. During the past 10 years, Ive made some great buying decisions by staying disciplined. And Ive also made disastrous investments when I let myself get emotionally wrapped up in a companys every move. Instead of enjoying lucrative payoffs, I was coping with frustration, anger, and financial losses.
If youre going to invest, you have to develop long-term fortitude especially if you want to invest in ambitious companies. Take Tesla Motors, for example. Lets say you love its mission, cars, and vision for the future. A co-worker gave you a hot tip at the end of 2015, and you enthusiastically purchased Tesla shares on that advice. Then Teslas stock fell from $240 to $143 at the beginning of 2016.
What do you do in that situation? Sell off and take the loss or average down? Anyone who took the latter option made the right call. Today, Teslas stock price is $238-plus. Buying more stock when the market is tight, known as averaging down, pays off for investors willing to stay the course.
Many people who invest on their own take advice from their friends, family, and what they see on TV. They get skittish at the slightest downturn and sell their shares in a panic. But if they did some simple research, theyd learn that many traders average down during these times, expecting an eventual return. In fact, 77 percent of investors view the current market volatility as a short-term correction instead of an ominous sign.
The biggest mistake you can make is to allow emotions to drive your decisions. Investors make critical mistakes when they become too emotionally attached. Sometimes, you should average down and wait out the storm; other times, the best choice is to sell and take the profits. Only logic can tell you what to do.
Playing the Long Game
Time and again, I see people raise the same concerns about flailing markets and whether they should get out before they lose everything. But my advice is always the same: A flailing market generally offers great opportunities for those who can stomach it.
Heres how to bear down without losing your lunch:
1. Invest in strong brands. Investing in organizations that you value and buy from regularly will ease your mind during stock drops. If you and your loved ones actually use the companys products, youll feel more confident that it will rebound.
You can also practice cost averaging to rebalance your possible losses while waiting for stock prices to rise. Perhaps you originally purchased 1,000 shares at $25 apiece, but theyre selling at $15 today. You can buy another 1,000 shares at the current market price to reach an average of $20 a share. But only do this if youve researched the companys balance sheet and believe it can withstand future corrections before it rebounds.
2. Follow the experts. Pay attention to what Warren Buffett, George Soros, Carl Icahn, and other prominent investors buy, and then copy their strategies in smaller measurements. Make sure these moves align with your portfolio, however. Blindly following celebrity investors can lead to disastrous missteps.
For example, many people bought Coca-Cola stock in the 1990s simply because Warren Buffett held shares in the company, not realizing that the stocks were overvalued. Some individual investors lost money because they didnt understand how different Buffetts circumstances were from their own.
3. Build a diverse portfolio. The safest approach to investing is broad diversification. You can use some of your 401(k) to buy mutual funds or exchange-traded funds, which allow you to invest in many companies rather than betting on one.
But exercise judgment and restraint, and dont try to protect against every conceivable threat. Understand the costs and rewards, and choose a few sound investments with which youre comfortable. Because trying to figure out when to buy and sell can be stressful (especially if youre inexperienced), my company recently built an app that allows people to exchange knowledge about markets and challenge one another to reach investing goals.
If you can maintain emotional distance from your portfolio and can handle a few bumps in the road, investing is one of the most rewarding learning experiences youll ever have. If the market crashes, dont panic. Instead, buy up stocks at low prices. It may feel counterintuitive at first, but youll be sitting pretty when those stocks rise again.
About the Author: Brian Balbirnie is the founder, CEO, and a member of the board of directors for IssuerDirect . IssuerDirect is the creator of a new technology, Investor Network, a social investment platform where professional and amateur investors can share and educate themselves on publicly traded companies.