A quote attributed to Titus Maccius Plautus, a Roman comic playwright, has unexpected relevance for investors: “In everything the middle course is best: All things in excess bring trouble to men.” Balance serves as the ideal metaphor for long-term investing. Needs change over time and shortcut stratagems that may work one year can prove ineffective – and even costly – the next. U.S. News asked experts to weigh in on some of the soundest investing strategies to use throughout your life
Researching the best stocks
Trying to buy individual stocks is a top mistake, says Thomas Henske, a certified financial planner with Lenox Advisors in New York. The thinking goes something like this: “OK, I’m going to research one company and become really familiar with that company, and then I’m going to buy that stock.”
That approach carries a lot of risk. “If it doesn’t turn out the right way, they get turned off investing forever,” Henske said. “And if does work out, they overestimate their stock-picking abilities.”
The better strategy is learning about terms like sectors, diversification or asset classes. It will be much more helpful, Henske said.
The other danger: Busily researching individual stocks — whether it’s large, familiar companies, such as Disney or McDonald’s, or lesser-known firms the investor thinks will pay off in the future — can eat up valuable time someone could spend learning about investing principles that actually provide some value.
Invest in what you understand
Ignorance is never bliss when betting on a particular sector or company over time. Otherwise, you may as well play the slots in Las Vegas. “If you don’t understand the business you invest in, you’re going to be highly unlikely to discern the noise from truly meaningful information that should factor into your decision-making,” says Thomas Sudyka Jr., president of Lawson Kroeker Investment Management in Omaha, Nebraska. Stay away from investment strategies that are too obscure, complex, or out-of-your-wheelhouse to keep up with. If you don’t really know how investments work, how can you expect them to work for you
Investing: Making comparisons
It’s tempting to compare different investment choices.
Someone has a CD at a bank, and they view it against the returns of the S&P 500 and how it’s performing currently. It would look pretty different, of course, if they compared it to that same stock market index in 2008, Henske says. (Just for fun, Henske recommends looking up the S&P 500 for the day you were born.)
The thought process goes like this: “I don’t like how this is doing compared to that,” Henske said. “And ‘this and that’ are apples and oranges.”
Perhaps someone has an international equities portfolio that is underperforming their U.S. equities portfolio. They conclude that U.S. equities are always better. “You have to be able to compare like to like, which is near impossible,” Henske said. “There’s always some difference that might be material.”
Start investing as early as possible.
The longer money is invested, the more potential it has to grow – that’s how Warren Buffett used stock investment strategies to his advantage: patience. “Investors who start early, practice patience and stick to a long-term investing strategy often see the best returns and financial success,” says Colton Dillion of Acorns, the investing app. Someone who contributes $1,000 to an IRA from ages 20 to 30, and then stops, has an edge over someone who starts at 30 and invests $1,000 annually for 35 years. Assuming a 7 percent annualized return, the first person will have $168,515 at age 65, and the second will have $147,914.
Waiting for the right time
New investors know the stock market has its ups and downs, but they get tense when the stock market is rocky. They may be tempted to buy when prices rise and sell when they fall. They may be tempted to check their portfolios too often.
It’s time in the market, not timing the market that matters, says Brent Weiss, a CFP and co-founder of Facet Wealth in Baltimore. “Trying to time the markets is a fool’s errand,” he said.
“Markets can be volatile, but they have historically trended in a positive direction,” Weiss said. The single biggest investing mistake people can make is selling when markets are low.
″[Say] the market goes down 10% and you sell [your investments] and put them in cash,” Henske said. “When the market goes back up, which it always does, you haven’t participated in the up — and you’ve locked in that loss.
Investing: Add a 401(k) match to your mix
It’s hard to believe people turn down free money that grows with time. But three in 10 workers with access to an employer match in their 401(k) fail to participate, according to the U.S. Bureau of Labor Statistics. “If your employer has a matching contribution inside of your company’s plan, make sure you always contribute at least enough to receive it,” says Kevin Meehan, regional president for Chicago with Wealth Enhancement Group. “You are essentially leaving money on the table if you don’t take advantage of the matching contribution.” There’s no shortage of investment strategies out there, but free money is the only guaranteed, risk-free home run you’ll ever get. Batter up!
Separate emotions from objectives.
If you treat a potential investment with the same partisanship as a sports team fan (or hater), you’re setting yourself up for trouble. “Separating your emotional involvement with a security from the purpose of its ownership will lead to better overall judgment and performance,” says Kenneth Hoffman, managing director and partner at HighTower’s HSW Advisors in New York. “The more open-minded you are to thinking about investments in a new light, the more likely you are to invest in something undervalued.” Conversely, no stock or investment strategy is worth much if, ultimately, you can’t execute it.
You can practice what Zara are doing in the fashion world
The founder (Amancio Ortega) is said to be the most hated man in the fashion industry. Here’s why:
Zara’s original mission derived from Ortega’s job in an exclusive fashion store in Spain. While he was working there he started copying clothes from exclusive brands and sold them from door to door. Even today, that’s Zara’s strategy. They “copy” other designers’ clothes and while these designers have to wait about a month to get the designs in store. Zara mass produces them in Asia and gets them in the stores after only two weeks. In other words, they copy the designs of the big brands (Dior, Givenchy,…) and sell them way earlier. In that way they have expensive looking but cheaper clothes and they remain up to date with the newest trends.
However, that’s not everything!
Zara’s strategy involves stocking very little and updating collections very often. Instead of other brands that only update once a season, Zara restocks with new designs twice a week! This encourages customers to come back to the store often. It also means that if the shopper wants to buy something, he or she feels that they have to purchase on the spot to guarantee it won’t sell out. And thus, these guys are always one step ahead.
Consider them the Goldman Sachs of fashion: Not very ethical, but it works.
Turn discretionary spending into investing.
Those who delay investing for years often confuse needs with wants. “Cellphone bills, cable TV packages and automatic services of all kinds gradually become necessities, and the would-be investor never jumps out,” says Stig Nybo, president of U.S. retirement strategy for Transamerica Retirement Solutions in San Francisco. “Investing takes discretionary income, and discretionary income takes discipline. Question those things that have become the norm but may not be necessities.” Before you become a millionaire in the stock market, you have to build up a large amount of upfront capital. That’s hard to come by with recurring (and unnecessary) monthly expenses
Put investments and cash reserves in separate buckets.
The biggest risk in investing involves needing your money at the wrong time, says Harold Evensky, a professor of practice in the personal financial planning department at Texas Tech University. “By balancing any funds you’ll need in the next three to five years. Or roughly an economic cycle, between a money market account and high-quality, short-term bonds, you won’t have to sell your investments at a loss. You’ll have liquid funds available when you need them, even if the market has crashed.” This rule of thumb refers to cash you may need on short notice; with the rest of your money, investing in stocks is usually one of the best options.