The Importance Of Staying Invested
Hollywood movies like Margin Call and The Wolf Of Wall Street give non-financial folks an easily-relatable insight to the stock market, or I should say, the perils of the stock market.
How many bubbles can you recall living through? Add to that non-stop news coverage of US presidents’ stock market score cards, with headlines such as “Dow Jones, Nasdaq and S&P 500 all lose billions after string of tweets from Trump appeared to put a trade war with China back on the agenda”. One could be forgiven for believing the stock market is simply too high-risk to be included in a retirement plan strategy.
Berkshire Hathaway’s long history of operating success and keen stock market investments has made it one of the largest companies in the world in terms of market capitalization. Its strategy is focused stock picks held for the long term. Over time, Buffet’s investing prowess became so noted that Berkshire’s annual shareholder meetings became a mecca for value investing proponents.
There are two lessons here: the stock market does deliver staggering costs of bad decisions, but generally the people who lose out big are those trying to speculate; and there are quality stocks which deliver good returns and absolutely belong in an investment portfolio.
Picking individual stocks requires a lot of research and keeping a keen eye on the micro and macro economic factors affecting those stocks. Playing the stock market isn’t beyond our capability, but it is often beyond our capacity as it simply requires more effort than many of us have time for.
Have you heard of dollar-cost averaging? It’s a strategy that allows an investor to buy the same dollar amount of an investment on regular intervals. The purchases occur regardless of the asset’s price. When a stock or asset is down, think of it as being on sale – your dollar buys more of it – and vice versa.
Dollar-cost averaging is a tool an investor can use to build savings and wealth over a long period. It is also a way for an investor to neutralize short-term volatility in the broader equity market. A perfect example of dollar-cost averaging is its use in 401(k) plans, US retirement savings plans.
A pragmatic approach is to invest in mutual or index fund accounts, or exchange-traded funds. Such funds have dedicated, expert teams behind them which research individual stocks, enabling you to invest in the stock market at a significantly reduced risk profile.
At Hoxton Capital we have a number of preferred regular savings plans and investment products. Our approach with clients is to decide on a comfortable monthly savings amount, discuss your fund pick strategy and help you select funds which give you confidence, and then periodically review your plan’s performance.
However, we always counsel to “pick and stick” with your selections. Don’t panic when a fund goes down; don’t fiddle with the portfolio whenever markets move; tune out media noise. Have a disciplined approach and the patience to keep your money invested for the long term. Staying invested is the best way to maximize potential returns.
It’s never too late to start a regular savings plan. The sooner you start, the longer you stay invested, the more you can take advantage of the power of dollar-cost averaging.