Study after study has proved it. While stock markets have averaged returns better than 10% per year for the last three decades, the average individual investor has lagged considerably.
You can avoid joining these struggling investors by remembering a few simple tips.
The first is to avoid buying only when stocks are hot. The easiest way to do that is to simply dollar-cost average. You’ll buy a little when prices are high, sure, but you’ll also be buying when stocks are depressed as well. Dollar-cost averaging will work out well during someone’s investing lifetime.
The next tip is to avoid selling, especially if your investments consist of passive index funds. Sometimes, like in 2008-09, stocks will fall a long way. This can come to a shock to someone who isn’t really paying attention. Nobody wants to open their statement and discover they’ve lost half their money. But it will likely happen.
No matter how terrible things may look, this is not the time to sell. If anything, it’s time to buy. Investors who put money to work during the depths of the last crisis are sitting pretty today.
Many investors ignore bonds, convinced 2% yields aren’t going to make anyone rich. But bonds serve a significant role in the average portfolio. They go up when stocks go down, which smooths out returns. A 40% loss might turn into a 20% loss if a portfolio has a strong bond component. That still stings, but it might be the difference between selling at the bottom in frustration and holding on.
