The secret to investing…it’s buy low and sell high, right? Can it really be that easy?
While a lot of day traders might follow that philosophy, we think there’s a lot more to it than that. Of course, we all want to buy investments at the lowest point in the economic cycle and sell them at the highest point, however we don’t have a crystal ball for perfect timing, and we need to make strategic decisions around our investments at any point in the market. Most of us aren’t day trading each and every day, and many who are, are blindly guessing, occasionally getting lucky, and more often than not losing a lot of money. Investing for the long term is what we as wealth advisors discuss with our clients, so we can work on long term goals and have a strategy for our money at any given point.
Here are a few ways that long term investing differs from the day trading practice:
- Portfolio Construction
When advisors begin working on the investing portion of wealth management with their clients, they work together to construct a portfolio that is suitable for the goals and risk tolerance of the client. The purpose is to get the greatest amount of possible return, while taking the least amount of risk that the client is comfortable with. These goals could be something far down the line, such as retirement, or just a couple of years from now like a lake home or a once in a lifetime Safari excursion. Once we know your goals and risk tolerance, we will build a portfolio of both stock and bond-based investments. The idea here is to capture the upside on the stocks when there is market growth, but to also holdup during a pullback on the bond side. The bond side of the portfolio also gives us a place to pull money should something unexpected happen and a client needs cash during a market downturn.
- Model Review and Adjustments
Now we have the portfolio constructed and the money invested. We are always monitoring the investment selection. What are the securities doing, how are the Portfolio Managers performing, and what is their plan should the economy take a turn? We monitor the headlines, the fundamentals in the market, and things such as corporate profits, unemployment and other economic factors that could play a role in how things turn out. If the market takes a turn, or we see that a security is underperforming given current conditions, we make decisions on what to do with that investment.
- Dollar Cost Averaging
Dollar cost averaging is something that most of us are already doing. If you have a 401(k) plan and you have part of your paycheck withheld and invested in your plan every other week, you’re participating in Dollar Cost Averaging. This is investing an equal amount of money at a certain interval, rather than investing everything at once. For clients who are uncomfortable with putting all of their money to work on one single date, because remember we don’t know exactly what the market is going to do, this strategy is one that becomes very useful in getting the money to work but also spreading it out over several weeks or months to enter at different points in the economy.
As you can see, there is a lot more to long-term investing than simply buying low and selling high. While we try to make educated predictions on market movement, we have to remember that we don’t have a crystal ball and need a strategy in place that works for all points in the cycle. This allows our clients to pursue their goals, knowing we have a plan in place should the market go up or down.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.