How to Invest in a Volatile Market

With the market not seeming to match what we see around us, how can we invest wisely?

Today we’re digging into what mistakes to avoid and how to be a wise, effective, and efficient investor!

How Not to Stress Out with Investing

With so many things going on this year,  it is understandable to wonder if right now is a good time to invest. 

Back in March, with things shutting down around the country and parts of the world, the S&P dropped more than 30%. While it’s climbing back up, it’s not been a smooth process at all. 

Another part that families struggle with is seeing this seeming mismatch between the headlines and the news about the market.

It’s enough to frustrate many investors. 

And with the financial fallout still here, some of you may be wondering if it would be better to pull out of the market altogether, shore up things at home, and come back when things aren’t so crazy. 

While others might wonder if they need to go all in and try to take advantage of what’s going on. 

I get it which is why  today we’re going to dig into these questions and concerns head-on. 

We’re looking at how to invest in a tumultuous and volatile market. 

In this episode we’ll get into: 

• The biggest mistakes investor make so you know what to avoid
• how to think approach your investment strategy and plan – you don’t want to go in there blind
• How simplifying may help you improve your investment returns

Ready? Let’s get started! 

Resources to Become a Savvy Investor

Looking to level up your investing habits? Here are some helpful resources to check out!

• Best Budget and Money Apps: Personal Capital, Tiller, Mint
• Grab Your Copy: Jumpstart Your Marriage and Your Money
• Join Our Thriving Families Community on Facebook
• Free 401(k) Analysis: Blooom
• The One Page Financial Plan
• Your Money or Your Life
• Rock Your Retirement
• The Simple Path to Wealth
• How to Beat 80% of Investors With 1% of the Effort

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The Biggest Mistakes Investor Make 

Let’s start with what not to do, especially when you’re investing in times like these. 

You’ll see there is some overlap in a few these, but I think it’s crucial to address the different questions, ideas, and concerns that pop up when it comes to investing. 

Mistake #1: Stopping Your Contributions

‘ I’m going to sit out on this’

Even if you’re fortunate enough to have a steady paycheck during this pandemic, I can understand the need to feel cautious with your finances. 

When I was doing the miniseries on handling the financial fallout from the pandemic, several times we talked about how important it is to build up your financial cushion. 

And if you don’t have that minimum of three to six months of essential expenses saved, you should definitely focus on that now. 

However, I’ve heard some concerns from families who are considering pulling money out of fear of how volatile things are now. 

That can be a mistake on two fronts. First, no one can predict the market. 

Second, time can be an incredible ally when it comes to your portfolio’s outcome. How? The power of compound interest. 

Yes, short term it’s hard to know which way it will go, but if you look at the market long term, you’ll see an increase. 

So think twice before taking your money out. Instead, it’s better for you to go ahead and just make regular, automated investments. 

Mistake #2: Trying the Time the Market

‘I Can Beat the Market’

This mistake is similar to the first, but coming from the opposite side. I’ve seen people try to time the market, thinking they’ll score an incredible investment. 

I know if you’re listening to this podcast, chances are you’re more interested and informed with finances than perhaps the typical investor, but studies have proven we’re more likely to benefit from following a system or plan rather than going with our ‘instincts‘.

We’ll get into this a bit further, but if you look at the preference history of an actively managed fund, who have experts and teams crunching numbers, you’ll see that they don’t beat the market.  

Regular investors simply don’t have the resources to keep up with the market by stock picking.

Mistake #3: Constantly Checking Your Portfolio and News

‘I got to do something now!’

Every day we are bombarded online, on TV, and even from friends and family with the latest news and hot stock tips.  

It can cause us to get anxious and focus on the short term to the point, we are checking up on our portfolios to move things around. 

Fortunately (or unfortunately depending on your viewpoint) it’s mainly noise that you can ignore.

The concept of noise vs signals is recognizing the inconsequential and useless information and instead of finding the actually meaningful information and using that to adjust your portfolio as necessary.

• Dial back on the news and be selective with your sources.  Ask yourself,  what is the credibility of this site or show? What is their goal and how do they make money? And yes, that includes personal finances blogs. A good many ((including here at Simplify & Enjoy) have some sort of partnership with companies, that doesn’t necessarily make it bad, but you should factor that into your decision.
• Review your investment plan. Keep a post-it or note about what your target asset allocation is for your portfolio. Have your reasons why you chose this accessible so you can refer to it when you’re tempted to chase a ‘hot tip’.
• Check the data yourself. News pieces tend to focus on the narrative or story, but that doesn’t give the whole picture. You have to be comfortable with the data behind the story. Does it make sense to you? If you don’t feel comfortable understanding it or perhaps with the argument, then hold off on acting on the ‘tip’.

Creating Your Investment Plan

If you’re thinking I’m going to tell you the 10 stocks to purchase right now, then prepare to be disappointed. 

Why not? 

As many client-focused and talented financial professionals will tell you,  there is no one size fits all investment plan. 

To be effective and efficient, you need an investment plan that addresses your particular goals, timeframes, needs, and it’s something you’d actually stick with. 

 Here’s where working with a certified financial planner can really help you. They can sit down (well, okay virtually meet) with you and have a meaningful conversation to get a clearer idea of you and your finances. 

Instead, I want to go over some key concepts you need to be familiar with and able to answer so you can craft a plan

• Diversify Your Investments
• Match Your Investments with Your Goals and Risk Tolerance
• Keep Your Costs Low

Diversify Your Investments

Diversification is spreading out your investments over different assets. An asset is what you’re investing in. And there are different asset classes like stock, bonds, or real estate, gold, and even art. 

The benefit of diversifying is that you can minimize getting hit with extreme peaks and valleys of each individual asset. 

One way you can do this with your investment portfolio is by going with options like mutual funds, where your contributions buy pieces of dozens, hundreds, or thousands of companies. 

And options like index funds can have you owning an entire sector or market. 

And how you break up your money with your investments is your asset allocation. 

A benefit of having the proper asset allocation is to fit your goals. Usually, investors seek aggressive growth in the long term and shift to more stability of their money in the short term (i.e. for people retiring soon).

Match Your Investments with Your Goals and Risk Tolerance

Just because an investment is doing well doesn’t mean it’s the right one for you. 

Why? Because we have different risk tolerance and goals. 

To invest wisely, you have to consider, how comfortable are you with risk? 

The gist of proper asset allocation is maximizing your return while minimizing your risk.

While maximizing returns seems clear, the risk is subjective and differs from person to person.

Everyone has their own risk tolerance based on a variety of factors, so you’ll see different investors choose different investment vehicles even if they are the same age.

Be aware that with assets, there is some correlation between risk and reward. 

Historically stocks may be more volatile in the short term, but they can offer more growth compared to bonds which can give a person nearing retirement some stability. 

Keeping Your Costs Low

One way you can hinder your portfolio’s return is having unnecessary fees and expenses. What’s frustrating is that you don’t always get what you pay for. 

One area where you see this with mutual funds, specifically with active vs passive ones. 

Actively managed’s goal is to beat the market or at least those similarly constructed funds.

A fund manager works with a team to research and try to predict what securities to invest in.

That means there’s an overhead to having this manager and/or team. 

And then there’s passive investing where you choose an index fund or something similar and you kind of set it and forget it. You’re not trying to time the market, just follow it.

Because it’s automated the costs are significantly lower. 

Now here’s the crazy thing – how well do you think active funds do again passive funds? 

Most people would love to beat the market, but looking at history and the numbers, there are plenty of investors who come out ahead by going the index route.

Repeatedly,  index investing has consistently beat actively managed funds.

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