4 tips for when the market takes a swing at you
You buy a stock, ETF, managed fund etcetera, thinking you'll hold on for the long-term, regularly adding to it. But then, as Mike Tyson so eloquently put, “Everyone has a plan until they get punched in the mouth”. For investors, those punches come from two different angles - the swings of the market and the non-stop talking heads in the media.
Getting hit is inevitable. Here are four tips to help you roll with the punches rather than have them knock you out.
1. Write down your plan and keep it handy
When you first started investing you probably had a plan in mind. You may have even written it down. If so, it probably noted how much you had to invest, how much you would add each month, what you would invest in and the reasons for investing in the first place.
If not, it’s a good idea to do so now. These are the things you can control. By referring to this plan when you get hit in the face, you can quickly see if you’re still doing what you said you would. If you are, this will help you stay on track. If not, you’ll realise you need to get back to where you were.
2. The antidote to thinking you can time the market is patience
No one knows when prices will crash or rise and if they did, they wouldn’t tell you about it. The best response to market volatility is a long-term perspective. The best investors in the world time the market only by accident. As Warren Buffett once said, “the stock market is a device for transferring money from the impatient to the patient”. The ability to be patient is a key market advantage over fund managers judged on their quarterly performance. The word ‘patience’ should be in your plan.
3. Keep it in perspective
If you’re fixated on riding the wave on the day-to-day movements of your portfolio, take a step back and look at a chart of STW here, one of Australia’s oldest ETFs. The reason I use this one is because it tracks the ASX 200 index. This is the market return.
Despite all the gyrations, the chart still slopes upward towards the top right-hand corner. And look at those dividends along the way. Over the long term, stock prices go up. If you’re a long-term investor, your portfolio’s value will go up to too, just not in a straight line. Keep it in perspective and ride the bumps along the way.
4. Avoid over-confidence
It’s a mistake for us to believe that experiencing a period of great returns is down to our own skill and good judgement. More often, it’s remaining invested in the market that’s responsible. All those investors that sold in early 2020 would now know that to their cost. Becoming overconfident can lead us astray.
Mike Tyson’s quote was made to the media before his first bout against Evander Holyfield. Holyfield did get punched in the mouth, but he had a plan, stuck to it and knocked Tyson out in the eleventh round. Be humble and stick to your plan.
Frequently Asked Questions about this Article…
Having a written investment plan is crucial because it helps you stay focused and on track, especially during market volatility. By referring to your plan, you can ensure you're following your original strategy and make necessary adjustments if you're not.
Patience is a key advantage for long-term investors because it allows you to ride out market volatility without making impulsive decisions. As Warren Buffett suggests, the stock market rewards those who are patient, transferring wealth from the impatient to the patient.
If daily market fluctuations are overwhelming, take a step back and look at the long-term trends. For example, the ASX 200 index shows an upward trend over time, despite short-term volatility. Keeping a long-term perspective can help you maintain confidence in your investments.
Overconfidence can lead to poor investment decisions, as it may cause you to attribute success to skill rather than market conditions. It's important to remain humble and stick to your plan, recognizing that staying invested is often the key to long-term success.
Market timing is often more about luck than skill, and even the best investors succeed by accident. Instead of trying to time the market, focus on maintaining a long-term perspective and being patient, as this approach is more likely to yield positive results.
To maintain a balanced perspective, focus on the long-term growth of your portfolio rather than short-term fluctuations. Remember that stock prices generally trend upward over time, and dividends can provide additional returns along the way.
Sticking to your investment plan during market swings is important because it helps you avoid making emotional decisions that could derail your long-term goals. A well-thought-out plan provides a roadmap to guide you through market volatility.
Mike Tyson's quote highlights the importance of having a plan and being prepared for unexpected challenges. In investing, this means having a clear strategy and sticking to it, even when the market 'punches you in the mouth' with volatility.
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