There will be some hotshot on Wall Street who makes what seems like a prescient call right before the next big market move. The media will elevate this person to star status, conducting interviews and touting the commentary as if it were investing gospel.
And when the next market turn comes, Wall Street will likely move on to the next guru because the first one proved to be a one-hit wonder, as has happened many times before.
If professional investors can't reliably time the markets, you can't, either. It's OK -- you're only human. Here's what you should focus on instead.
You are your own worst enemy
Here's the thing: Emotions can be irrational, and our emotions drive far too many of our investment decisions. That's bad when it comes to identifying key stock market events like market tops and market bottoms.
Generally speaking, when the market is down, investors are in a state of fear, selling in the hopes of minimizing losses. When the market is climbing, the opposite tends to happen with investors buying nearly anything because they fear they're going to miss out on the rally.
Image source: Getty Images.
If you get caught up in the melee, don't beat yourself up. Emotions are tricky things. What you need to do is learn the important lesson in this fact: You are your own worst enemy.
Once you accept that, you can go to work on a plan to deal with it. That's where you'll likely have the biggest impact on your investment success over the long term.
Some options for solving being human
The simplest solution to the emotional pitfalls you face is to outsource the investment process. Instead, you can focus all of your attention on saving money to put into the market, which will probably have a far bigger impact on your long-term wealth, anyway.
The easiest punt is to buy a broad-based index fund like the SPDR S&P 500 ETF Trust. It is low cost with an expense ratio of 0.09%, and you'll never underperform the market.
Of course, you'll never outperform the benchmark index, either, but that's the point. The S&P 500 offers a diversified basket of stocks that serve as a barometer for the overall market.
Data by YCharts.
That said, if you aren't comfortable with just owning stocks, you might want to consider a balanced fund like the Vanguard Wellington Fund or the Vanguard Wellesley Fund.
The key difference between these two actively-managed mutual funds is the percentage they allocate to bonds. Wellington's goal is roughly 40% bonds while Wellesley's is about 60%. That difference allows you to better tailor your investments to your personal tolerance for risk.
For investors who enjoy picking out individual stocks, sit down and really think about what you want to buy and why -- not a specific stock but a type. You might want to own companies with strong finances, good businesses, and long histories of growing dividend payments, for example. Write that down. Then, create a checklist of what would make a company attractive based on those parameters.
Going further with that example, you might only buy companies with simple business models and investment-grade balance sheets that have 10 consecutive years or more of annual dividend increases. To make sure you are buying at an attractive price, you might also include a historically high dividend yield in the mix.
This won't guarantee success, of course, but it will help you avoid buying stocks erratically. Consistency is vital when it comes to investing. The important part here is holding yourself accountable to your chosen approach by writing it down and following it. If the approach isn't working, tweak your strategy.
There are no easy answers, and you will make mistakes
If you've been hunting for the market bottom (or top) and been unsuccessful doing so, it's OK! You will make mistakes when investing -- it's how people learn. The vital next step is to make the changes you need to move closer to success the next time, like adopting one of the more sustainable strategies outlined above.
