Nashville Business Journal Guest Column: Here are 4 tips to help you not lose money in the stock market
As seen in the Nashville Business Journal:
The stock market can be quite intimidating, especially knowing nearly everyone may have lost money at one time or another. Knowing this why do people continue to risk investing in the stock market? How are some so successful while others flounder?
Let’s answer these questions by first looking at three facts about the stock market:
- The stock market goes down.
- The stock market goes up.
- Over the long term the stock market sets new high records.
If the stock market continues to set new high records then how do investors “lose” money?
In a word – fear.
Studies by Dalbar, Inc. show that the average investor has lower average annual returns than institutions. Unlike institutions the average investor at some point makes one big mistake – they let their emotion and short-sighted view of their finances dictate their investment decisions. Time and time again you will most likely watch the average investor move their money out of the market and go to cash when the market is down.
Selling out when the market goes down seems like the right thing to do emotionally. “I don’t want to ‘lose’ any more than I already have” is an understandable thought. However, this is where the problem lies. When you sell your stocks and go to cash that investment no longer has the opportunity to grow back thus this could create a PERMANENT loss.
The S&P 500 has averaged an intra-year decline of around 14% each year going back to 1980 (The S&P 500 consists of 500 US companies, chosen from size, industry group, and liquidity and is a market weighted index). During this same period, the S&P 500 has ended each calendar year with positive year-over-year returns 27 of those 36 years. While past performance doesn’t guarantee future results, it can point to a historical trend.
Let’s use a real world example to show how it’s possible for the market to continue to have potential positive returns. When you own a security you essentially own tiny pieces of several different companies. Regardless of what the stock market does today, you will likely still stand in line at Wal-Mart or Walgreens (often owned by certain investors). It doesn’t matter if the market is up or down, most companies will still be selling their products or services.
Reviewing everything we’ve discussed, how can you avoid “losing” money in the stock market?
- Have a well thought out long term financial plan and stick to it regardless of your emotions.
- Have a reasonable cash reserve that would cover spending for a period of time (depending on your particular needs).
- Take a long-term investment approach, one that is goal and age appropriate. Remember that you should invest through retirement years, not just to your retirement.
- Don’t make the big mistake of selling out when the market is down!
There are many investment approaches, especially in today’s “do it yourself” mindset. The challenge is not letting your fear make your decisions. With wise counsel you can avoid emotional stock market mistakes in which you permanently lose money.
Bob Sircy, CPA
Sr. Vice President
Southwestern Investment Group
Financial Advisor, RJCS
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Bob Sircy and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.