Image: Jim Linwood via Flickr.
2016 has been cruel to investors so far, following up a flat performance in 2015 with substantial losses. Stocks are down more than 10% from their recent highs, and many investors are getting increasingly jittery that the seven-year-old bull market has already come to an end. Before you give in to rising panic about the potential fate of your investment portfolio, there's one thing you can do to make sure you make a smart decision with your money: make a written strategic plan for your investments and stick to it.
Following the greats
The most successful famous investors have two things in common. They have a core competence that sets them apart from most of their peers and have figured out a strategy based on that competence that works in the investing world. They also have the courage and discipline to follow their convictions even in the face of high levels of stress.
Notice, though, that successful investors don't all follow the same investing philosophy. Some, such as Warren Buffett, cling to value-based strategies, seeking to buy great companies at good prices. Others look at companies with high-growth potential early in their corporate existence and hold them as their share prices soar into the stratosphere and beyond. Still others can successfully identify times when one particular method will work well, and then shift to another method with which they feel equally comfortable when the market environment changes.
This above all: to thine own self be true
More importantly, you don't have to become a world-renowned icon of the financial community to be a successful investor. What's far more important is to stay committed to a reasonable investing strategy rather than bailing out at the worst possible moment.
It's always easy to think about a strategic plan for your money during good times. When markets are rising, investing aggressively seems like a natural way to make your money grow, and you can dismiss the risks involved as merely theoretical.
The key, though, is what happens when tough market conditions hit. Many investors make the mistake of thinking they have more tolerance for risk than they actually do, and it takes a bout of sharply declining stocks to get most people to have a realistic sense of what they'll actually do in a sustained downturn.
Those who mostly follow asset allocation strategies using exchange-traded funds or mutual funds should focus on whether their willingness to take a loss is in line with their actual allocations. If the 10% drop we've seen so far has you staying awake at night with worry, then you need to consider reducing your risk in your portfolio -- even if financial theory would say that you should maintain a higher percentage of your assets in stocks and other higher-risk investment vehicles. If you don't, then you'll find that if the stock market ends up falling 20% -- or more -- it'll be almost impossible to avoid panic-selling at the worst possible time.
The value of writing it out
What most investors find during times of trouble is that they can't remember the reasons they thought a particular stock was a good investment. During the financial crisis in 2008 and 2009, nearly every stock in the market suffered substantial declines, but the actual impact of the crisis on the fundamental business models of various companies differed greatly. Some companies saw their stocks fall even though they were left relatively untouched by the recession. Even though investors understood that those companies would survive and even thrive once the crisis was over, many of them still sold at lower levels because they were simply unwilling to watch their portfolio balances fall any further.
With individual stocks, writing down your investment thesis is valuable for two reasons. First, when a company is healthy but its stock drops, you can feel comfortable holding on or even buying more shares. Second, when something happens that does challenge your investing thesis -- even if it doesn't send the stock price downward -- you can identify it as a potential danger point and take action right away.
Panic-selling is your worst enemy as an investor, and the most successful investors in history have all found ways to harness their emotions rather than giving into them. By coming up with a solid investing plan that works for you and that you can stick with through thick and thin, you'll go a long way toward becoming a successful investor over the long haul.
