In today's unstable market environment, it's too easy to let our pre-historic brains take over and follow the herd; that's what fight or flight is all about. When this happens, the investor typically has a tendency to sell when investments are beaten down, and buy when they've been too high for too long. For instance, you sell your stock at a loss, keep it in a money market account where it's not keeping up with inflation, then go back into the market when it's been high for a long time.
So, here are some rules to play by when the market takes 400, 500 and 600-point daily swings:
Invest In Only The Best
I know things change, but my late father, who I consider a brilliant man, said as long as you invest in the blue-chips, you'll do fine. The caveat is that what might be considered a blue-chip stock today, may not be one tomorrow. You do have to keep your ear to what's going on in the world and make changes; however, what was good about a company last year, if it is a really solid company, should be good for many years to come.
Speaking of knowing what's going on in the world, think about emerging markets. Not only do these economies have growing businesses, but with those growing businesses comes a growing middle class that will consume many goods and services. Research those markets and consider which ones are comfortable to you.
Invest According To Plan
Just like you need a plan to direct your day-to-day finances, you will need a strategy for your investing. Start with your risk tolerance; any investment advisor can give you one and you'll see where you land on the spectrum of conservative to wildly agressive. Create your portfolio from this; if you're aggressive, that could mean 70% stocks, 20% bonds and 10% cash.
Invest For Diversification
Based on that plan, it's not only important to diversify between asset classes, but within. So, you want to have a mixture of stocks and bonds, real estate, etc, buy you want to have different types of stocks (growth, industrial, high tech, etc.) and different types of all the other investment classes.
Invest Your Own Money
Duh? What I mean by this is not to borrow to invest. Your investment could diminsh in value and you still owe on it. For those of you who are paying on homes that are upside down, does this sound familiar?
Invest Only If You Can Afford To Lose The Money
Yep, the value of any investment can go to zero. If you're at the casino, it's the same thing; I consider it entertainment. Then, if you win, gamble on your winnings, if you still want to stay in the casino. Same with the market.
Invest Only For The Long-Term
While you're keeping up on everything going on in the market, remember you in it for the long term and you'll never time the market, so don't try. If you were in the market every day in the 60-year period from 1945 to 2005 $1 in the S&P 500 would have grown to over $800; however, if you pulled out for the 48 worst months, which would only be equivalent to four years during that 60-year period, your $1 would have only grown to a little more than $15.
What are some of the things that make you "pull the trigger" and rush out of the market?