The stock market volatility of the past few years has taught some valuable lessons about the stock market:
- The market tends to revert to the mean. There is a tendency for the stock market, when it has an extended period of above- or below-average returns, to revert back to the average return. Thus, following an extended period of above-average returns in the 1990s, the stock market experienced a significant downturn, helping to bring the averages back in line.
- Don’t chase performance. Investors often move out of sectors that are not performing well, investing that money in investments that are currently high performers. But the market is cyclical, and often those high performers are poised to underperform, while the sectors just sold are ready to outperform. Rather than trying to guess which sector is going to outperform, make sure your portfolio is broadly diversified.
- Avoid strategies designed to get rich quick in the stock market. The stock market is a place for investment, not speculation. When your expectations are too high, you have a tendency to chase after high-risk investments. Your goal should be to earn reasonable returns over the long term.
- Don’t avoid selling a stock because you have a loss. When selling stock with a loss, an investor has to admit that he/she make a mistake, which is psychologically difficult to do. When evaluating your stick investments, objectively review the prospects of each one, making decisions to hold or sell on that basis.
- Make sure an investment will add diversification benefits to your portfolio. Diversification helps reduce the volatility in your portfolio, since various investments will respond differently to economic events and market factors. Yet it’s common for investors to keep adding investments that are similar in nature. This does not add much in the way of diversification, while making the portfolio more difficult to monitor.
- Check your portfolio’s performance periodically. While everyone likes to think their portfolio is beating the market averages, many investors simply don’t know for sure. So thoroughly analyze your portfolio’s performance periodically. Compare your actual return to the return you targeted when setting up your investment program. If you aren’t achieving your targeted return, you risk not reaching your financial goals. Now honestly assess how well your portfolio is performing. Are major changes needed to get it back in shape?
- No one knows where the market is headed. No one has shown a consistent ability to predict where the market is headed in the future. So do not pay attention to either gloomy or optimistic predictions. Instead, approach investing with a formal plan so you can make informed decisions with confidence.
Copyright © Integrated Concepts 2012. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.