There are no secrets to making millions in the stock market, everyone knows the formula: buy low and sell high. It's that simple (OK, simple to say, not so simple to do). Unfortunately, the easier and much more frequent action is just the opposite: buy high and sell low.
Anytime the stock market takes a dive, you can see money flowing out of stocks (most often from mutual funds) and going to cash or safe fixed income vehicles, such as U.S.
Treasury bonds and so on.
The minute the stock market rebounds, much of the money that left on the dip comes back, but not until the upswing is well underway. The result is sell low and buy high.
The secret to avoiding bad decisions when the stock market is on one of its regular roller coaster rides is to have a plan and stick with it. If you have been watching the stock market for 10 years or more, you know that prices will go up and prices will come down - sometimes the changes in direction are sudden and dramatic.
The first part of creating a plan is to determine how much of your portfolio should be in stocks. The old rule of your age subtracted from 100, which gives you the percentage of stocks you should own is a good place to start.
Adjust that number up or down with your tolerance for risk. For example, if you are 45 years old, the formula tells you the 55% of your portfolio should be in stocks - adjust that number as you see fit. One of the stumbling blocks that investors face is forgetting that all stocks are not equal in terms of risk.
If you had 55% of your portfolio in top-quality, blue chip stocks, you would have a fairly conservative position. On the other hand, if 55% of your portfolio was invested in tech startups and penny stocks, you would have a very aggressive portfolio.
The key here is to take that portion of your portfolio you want in stocks and break it up into various segments of the stock market. For a young person (age 30 and under), a portfolio of aggressive growth stocks may be appropriate, since they have years of investing in front of them.
On the other hand, that same young person may not be comfortable with that much risk and could decide that only a small part of their stock investments should be in high-risk equities and the rest should be more balanced between blue-chip stocks, value stocks and a small portion in foreign stocks (probably best accomplished with an exchange traded fund or mutual fund).
The same plan applies to every age group up to around age 55 (assuming you plan to retire at age 65) with appropriate changes for risk tolerance and so on. Here are the major components of a model portfolio that will work for most investors:
Assign a percentage to each category according to your tolerance for risk. There are no firm rules on what percentage you should assign, other than the older you are the lower your exposure to high-risk stocks should be.
Include in the above categories a mix of small, mid and large cap stocks.
Your goal is growth, whether that is modest growth for the risk adverse or a more aggressive strategy if you can still sleep at night without worrying about your portfolio.
At or around age 55, you should be thinking about moving assets into less risky categories, while still holding on to some stocks as a hedge against inflation.
When the stock market begins another roller coaster cycle (either up or down) keep your percentages where you are comfortable and don't over react.
If the market tanks, recheck the reason you bought the particular stocks you did. If the companies still look good, it may be a time to add to your holdings.
If the market zooms up, it may be time to take some profits and either put the money into a safer place or invest in more bonds to keep the balance you want.
Either way, stick with the companies you selected until there is no longer a compelling case for holding them (a drop in the over-all stock market does not usually change the reason you bought the stock).
Stick with your plan and you may see opportunities to buy low and sell high, just remember to give me a ride on your private jet.
Anytime the stock market takes a dive, you can see money flowing out of stocks (most often from mutual funds) and going to cash or safe fixed income vehicles, such as U.S.
Treasury bonds and so on.
The minute the stock market rebounds, much of the money that left on the dip comes back, but not until the upswing is well underway. The result is sell low and buy high.
The secret to avoiding bad decisions when the stock market is on one of its regular roller coaster rides is to have a plan and stick with it. If you have been watching the stock market for 10 years or more, you know that prices will go up and prices will come down - sometimes the changes in direction are sudden and dramatic.
The first part of creating a plan is to determine how much of your portfolio should be in stocks. The old rule of your age subtracted from 100, which gives you the percentage of stocks you should own is a good place to start.
Adjust that number up or down with your tolerance for risk. For example, if you are 45 years old, the formula tells you the 55% of your portfolio should be in stocks - adjust that number as you see fit. One of the stumbling blocks that investors face is forgetting that all stocks are not equal in terms of risk.
If you had 55% of your portfolio in top-quality, blue chip stocks, you would have a fairly conservative position. On the other hand, if 55% of your portfolio was invested in tech startups and penny stocks, you would have a very aggressive portfolio.
The key here is to take that portion of your portfolio you want in stocks and break it up into various segments of the stock market. For a young person (age 30 and under), a portfolio of aggressive growth stocks may be appropriate, since they have years of investing in front of them.
On the other hand, that same young person may not be comfortable with that much risk and could decide that only a small part of their stock investments should be in high-risk equities and the rest should be more balanced between blue-chip stocks, value stocks and a small portion in foreign stocks (probably best accomplished with an exchange traded fund or mutual fund).
The same plan applies to every age group up to around age 55 (assuming you plan to retire at age 65) with appropriate changes for risk tolerance and so on. Here are the major components of a model portfolio that will work for most investors:
- Blue-chip stocks
- Growth stocks
- Value stocks
- Blend stocks
- Foreign stocks (usually no more than 10% of your portfolio)
Assign a percentage to each category according to your tolerance for risk. There are no firm rules on what percentage you should assign, other than the older you are the lower your exposure to high-risk stocks should be.
Include in the above categories a mix of small, mid and large cap stocks.
Your goal is growth, whether that is modest growth for the risk adverse or a more aggressive strategy if you can still sleep at night without worrying about your portfolio.
At or around age 55, you should be thinking about moving assets into less risky categories, while still holding on to some stocks as a hedge against inflation.
When the stock market begins another roller coaster cycle (either up or down) keep your percentages where you are comfortable and don't over react.
If the market tanks, recheck the reason you bought the particular stocks you did. If the companies still look good, it may be a time to add to your holdings.
If the market zooms up, it may be time to take some profits and either put the money into a safer place or invest in more bonds to keep the balance you want.
Either way, stick with the companies you selected until there is no longer a compelling case for holding them (a drop in the over-all stock market does not usually change the reason you bought the stock).
Stick with your plan and you may see opportunities to buy low and sell high, just remember to give me a ride on your private jet.