When I was a broker, my wealthiest clients had one thing in common: They owned their stocks for years. In some cases, they held for 50 years or more, with no intention of selling their securities. This was a valuable lesson for me: Don't become a nervous Nellie and bail out during a correction. That's the main reason why most investors constantly underperform the S&P 500 index.
My advice? Do your homework and research investment strategies. Learn what you can expect from each strategy using long-term results at a minimum of 10 years or more. Ask yourself whether you want a portfolio that is a 50%-50% stock-bond mix, 60%-40%, or 100% stock. Stocks will fluctuate, but bonds aren't risk-free, either. It's important to know your position regarding risk, and only you can define your tolerance level.
There's one particular question I like to ask people: "If the stock market fell by 50%, would it change your life?" This has happened as recently as the 2000-2002 bear market. Did you pull out for fear of losing everything? Many latecomers changed strategies for a more conservative approach just when the market bottomed. The fortunate or skilled bought when the S&P was at 776.76 in October 2002. At its current 1409.12, the S&P 500 Index is up more than 80 % from that low just four short years ago.
All through the '90s, dot-com mania sizzled. Did you buy those stocks in the early '90s when few heard of them, or wait until the train left the station? Commodities, oil, metals, and real estate all followed, becoming the preferred areas of investment. My point? No one knows what the next exciting area of the market will be.
Do not chase returns. This common mistake appeals to many investors, and it can knock you off track. Stick to your strategy. Remember, the market rotates. First it'll be semiconductor issues moving up in value, then transportation stocks, utilities, value stocks, or growth stocks. It's smart to use index funds to diversify your portfolio, since no one knows how long each area will remain hot. You may not get that big home run everybody talks about at the water cooler, but you can sleep at night knowing you're not going to strike out, either. Everyone knows someone who made a ton of money with dot-com stocks, then lost it. Don't make the same mistake.
Once you've decided on your strategy, stick with it. Every time someone on the radio or TV mentions a hot new area of the market, consider what they have to say, but file that information away in your knowledge bank. If you just can't stand to be away from the action, take 10% of your invested funds and try to beat the market. However, always keep your original 90% core holdings invested in your planned strategy.
In January, we will begin our 17th year of financial independence. We didn't get this far by trading incessantly, trying to beat the market. We're investors, not traders. That said, you can do all the financial planning you want, getting all of your retirement ducks in a row, but no one knows what the future will bring. How many couples take decades to plan and prepare for their retirement, only to have one of the spouses get sick and blow a hole through their dreams?
That's one of the reasons we took the early retirement leap back in 1991. Was it risky? Sure. But we both knew that working 60-80 hours a week was keeping us from living the kind of life we wanted to pursue further. Do we regret the decision? Not for one minute.
So what are you waiting for? Do your math, come up with a plan that works for you, and get on with living life to the fullest, and following the passions that make you excited to wake up in the morning. Life is for living.
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In 1991, Fool contributors Billy and Akaisha Kaderli retired from the brokerage and restaurant businesses to a life of international travel. Visit their website at RetireEarlyLifestyle.com, and check out their new CD book,The Adventurer's Guide to Early Retirement.