Buy low and sell high. Everyone knows that one. But most people buy high and sell low. And that’s why you need an investment strategy.
Investors get half of the S&P 500 returns.
According to JP Morgan’s Guide the Markets, the S&P 500 earned 6.1% annually from 1999 to 2019.
However, the average investor earned just 2.5% during that same time frame.
The reason is simple – investors buy and sell their investments at the wrong time.
Why investors buy and sell at the wrong time
We’re all afraid of losing… but we’re also afraid of missing out.
When the market is “hot”, our FOMO kicks in and we buy.
Then when the market has a temporary downturn (as it always does), we run for the hills and sell.
Then after we think the coast is clear, we dip our toe back in the water and buy back in (but just a little).
And finally, the market gets hot again… it’s FOMO City… and we buy at the top once more.
Rinse. And repeat.
Throw in a dash of “crystal ball reading” and our investment decisions become entirely based on our emotions.
And the inevitable result is buying high, selling low and destined for a lifetime of half the S&P 500 returns.
The solution is simple. – remove the emotions from our investment decisions…
The solution is an investment strategy
Professional Investors (i.e. pension funds, university endowments) manage money based on an investment strategy and a process. This takes the emotion out of their investment decisions.
Goodbye FOMO and fear of losing!
If their goals have changed or they realize their risk tolerance isn’t as high as they thought it was, then they’ll consider a change.
They’ll meet with their investment committee and if everyone agrees, then they’ll update their Investment Policy Statement and execute.
This ensures they are not making reactive decisions to the latest poll numbers or pandemic or economic numbers.
How to develop your investment strategy
Luckily, the “science” behind an investment strategy is not terribly complicated.
So you can create your own personal investment strategy at home.
And I’ll show you how next week…
