Has the recent market turmoil made you uncertain about what you're doing with your money? If so, you're in grave danger of making a huge investing mistake, because you're missing the most important element of success in stocks: self-confidence.
The best way to get the self-confidence you need to invest well is by having a clear, easy-to-follow investing plan. Unfortunately, many investors -- and not just inexperienced ones -- have a three-step plan that looks like it came from South Park:
- Buy some stocks.
- ???
- Profit.
What's step 2?
When the stock market is rising, understanding exactly how you're making money doesn't seem very important. During the dot-com boom, many people didn't even bother finding out what companies like Priceline.com (NASDAQ:PCLN) and F5 Networks did -- they just traded the ticker symbol and banked their profits. Similarly, until recently, you've been able to sit back and watch your account balances go up steadily over time, secure in the knowledge that stocks are the best way to make the money you need to reach your financial goals. The positive feedback from your gains reinforced your commitment to your investments.
But when the market dives, everything changes. Suddenly, it's painful to be fully invested in stocks. You don't get that nice reward of seeing your account value rise. It's enough to make even the most experienced investors wonder whether they're doing the right thing with their money. It's vital to have an investing plan to refer to -- so you can be sure you're still on track.
One size fits you
Fortunately, that's not as hard as it seems. Because there's no one right way to invest, you can tailor your investing plan to fit your particular style. Whether you like a buy-and-hold-forever strategy or a more active style, you can create a plan that matches your risk tolerance and that will guide you through the market's ups and downs.
The key to any plan, though, is how it handles bad markets. If you don't have confidence in your plan, you're prone either to pick stocks that don't really fit your goals, or to give up on your investing plan entirely.
Don't do the switcheroo
When your investing plan is working, you can always find attractive stocks that fit your style. But when problems arise, straying from your core approach can seem inviting.
For instance, if you're a conservative investor owning large-cap dividend-paying stocks like Pfizer (NYSE:PFE) and Freddie Mac (NYSE:FRE), you've taken a double hit from weakness in financials and big drugmakers. In comparison, stocks in hot sectors, such as solar star First Solar (NASDAQ:FSLR) and fertilizer producer Agrium (NYSE:AGU), have hit home runs for investors lately. Especially after losing money, you might want to go beyond your preferred style in the hope of a quick score -- which can often lead to further losses.
If things are really bad, you might just want to throw out your investing plan entirely. Maybe you used to think that buy-and-hold investing was the way to go, but after watching huge gains on stocks like Sirius Satellite Radio (NASDAQ:SIRI) and General Motors (NYSE:GM) evaporate, you're ready to turn into an active trader. Similarly, if you've seen value stocks hit the skids, you might think growth is the better play.
Before you jettison your whole portfolio, though, remember that your goal isn't to beat every other strategy each and every year. You just want solid long-term results. When you think about it, you'll often see that your plan isn't the problem -- your impatience is.
It's hard to stay confident in the face of paper losses. Yet while the market may continue to fall in the coming months and years, that doesn't mean you'll never achieve the dreams you have for your money. It just makes it that much more important to find the resolve to face adversity in search of success.
For more on how to invest better, read about:
- Whether falling home prices are dooming your retirement.
- The worst investment we've ever seen.
- How to tell whether your portfolio is too risky.
