Growing up, we were told there is no such thing as a free lunch. I suspect few parents realized how powerful this advice would be for future investors.
Understanding the connection between the amount of risk you are comfortable taking, and the corresponding return you should expect, serves as a key equation when building out your investment portfolio. Based on your personal financial goals and life circumstances, you can determine the level of risk you’re realistically willing and able to take. However, lack of discipline, or more commonly greed, often pushes an investor into a riskier portfolio in search of higher returns, resulting in financial ruin. I have dedicated my career to ensuring our members avoid falling into this all too common trap.
Long-term charts can make investing look easy. The reality is that, in the short-term, both the U.S. and international stock markets fluctuate regularly and significantly. This fluidity preys on emotions and reactive investing.
As of 2018, the AVERAGE intra-year S&P 500 (an index that tracks large, US companies) decline is roughly 14%. A simple example, if you had $100,000 invested, at some point in a given year you would have likely seen that value drop to $86,000:
This roller coaster can be a challenging and scary ride for both new and experienced investors.
Unfortunately, investors frequently sell their investments after experiencing what should only be temporary losses. Without a disciplined strategy, panicked and reactive selling causes investors to miss out on the great wealth the market inevitably provides in the long run.
The very reason investing works, is because the risk of loss is ever present. If the potential for loss didn’t exist, stocks and your bank’s savings account would amount to the same returns. Remember, there is no such thing as a free lunch.
The ability to accept the risk of short-term loss is the most difficult, but most lucrative, trait when investing in the stock market.
For a lot of us, even the idea of losing money keeps us out of the market. The fear can be paralyzing. This is why at Driven Wealth Management, we partner with our members and spend a a significant amount of time educating them along their journey. There are few things more rewarding than watching someone initially terrified of the market proudly showcase their strategy a few years later and declare how grateful they are to have gotten started.
We’ve all heard the advice on making money in the stock market: buy low, sell high. Hopefully, awareness that the feeling of being on a rollercoaster is normal, even expected, will help you avoid the pitfalls that so often cause investors to reverse this popular expression. By staying grounded in a solid investment plan and focusing on the long-term goal, you can avoid reactive behavior that results in losses. Investing early is important. Staying invested is critical.
If you are ready for a long-term plan, we can’t wait to help you. Talk to us today.