To receive a return on your investment, first you must invest (and stay invested).
You cannot expect your stash of cash to grow when it is lying fallow. It’s hard to imagine a more basic principle than that, so why do so few investors manage to embrace it? The answer is found in a sentiment you may have heard before: Investing is simple, but it’s not easy.
It’s relatively simple to accept the notion of no pain, no gain. To earn returns, you must put your assets at risk in ventures that are expected to compensate you for your faith that they will succeed … if they do. Then you must patiently await the desired success, knowing that it is expected but not guaranteed. The riskier the ventures, the less certain the outcomes, but the more you can expect to earn for enduring the uncertainty … if you do.
Instead, many investors panic when market risk arises and move their money to the proverbial sidelines. Conversely, they also fret that they’re going to miss the boat when the market surges, so they pile into whatever is the latest success story. By chasing and fleeing hot and cold markets, investors are undesirably buying high and selling low. They are also disregarding decades of empirical evidence that informs us that one of the best ways to capture long-term market growth is to build a solid, individualized plan, and to then stick to the plan by riding out the market’s near-term ebbs and flows.
With this simple strategy, you’re trusting that the market will continue to do what it has done for many decades when viewed from a long-term perspective: It has grown. Why is it that so many investors ignore this common-sense strategy – be there and stay there – and instead cut the cord during turbulent times?
To echo our aforementioned sentiment, it’s simple to understand how the market’s gains and pains are so closely related. But it’s never easy to endure the pain when it occurs – whether that’s in the form of plummeting markets or tempting trends. Like a first-time skydiver, you cannot know how you’re going to feel and what you’re going to do about a free-fall until you’re in it. Behavioral finance informs us that, thanks to our most basic instincts, we’re subjected to a host of financially damaging biases – loss aversion, recency, herd mentality and many others – that lead us astray during these sorts of “fight or flight” market conditions.
This is why you want to prepare for your investment leaps well in advance, preferably with a fiduciary adviser at your side to help you maintain your resolve. In closing we offer this timeless advice from Larry Swedroe, a widely followed financial author:
“The key to successful investing is to get the plan right and then stick to it. This means acting just like the lowly postage stamp that does one thing but does it well. It sticks to its letter until it reaches its destination. The investors’ job is to stick to their well thought out plan (if they have one) until they reach their destination. And if they don’t have a plan, write one immediately.”