Here it is, and I’m giving the secret away to you for free! The #1 secret to long term investing is…
Ignore the stock market!
Wasn’t that easy? Thanks to the twenty-four hour news cycles and a million cable television channels, investors are glued to the ticker tape of stock market results. How did the Dow Jones Industrial Average do this week? It does not matter. Or, it should not matter to you if you are a long term investor. In fact, I hope the market heads lower (in the short term) because I want to buy some cheap stocks.
Our Best Friend…Time. If you are decades away from retirement, what do you care about the market’s movement this week. I care where the market is going to end up in the year 2040, not 2010. In fact, given the historic average rate of return (approximately 8% annually), the Dow Jones would double in the next nine years to over 19,000. The best thing that young investors have going for them is time and compounding interest. There will be exponentially more money in retirement when someone can start investing as early as possible. Waiting even just four years to begin investing can cost someone hundreds of thousands of dollars in retirement.
Make It Automatic. Make your investments automatic. Do not try and time the market. There have been academic studies that show people lose almost 5% in potential returns by trying to time the market. Instead, you should continue to buy a set amount of money through dollar cost averaging or systematic investing which invest a set amount of money every month regardless of the stock or mutual fund’s price. So, in some months, you will buy more shares when the price of a stock is lower and less when the price rises. Thus, you will reach and average share price that is your cost basis smoothing out the bumps in the road. Hence the name….dollar cost averaging. If you make your investing automatic, you will not worry about how bad or good the stock market’s indices are doing.
Stop Watching TV. I recently stopped watching the news, both financial and regular news. It just upsets me because of all the negative stories on the news broadcasts. I really think that my outlook on life and disposition have greatly improved after I stopped watching the news. The oil spill in the Gulf of Mexico is a horrible travesty, but there is not much we can do by getting worked into frenzy about it. The same can be said about watching the stock market swing up and down in the short term. I heard someone make a great analogy for the stock market. Investing in the stock market is like walking up a flight of stairs while playing with a yoyo. You know that the overall market is eventually going to head high (towards the second floor) because the market has returned 8% to 10% historically over its long lifespan. But, in the short term, the market is constantly going up and down like the yo-yo on its way to the top.
It takes guts to not watch the stock market when so many of your hopes and dreams for a secure future and retirement are relying on it and its success. But, if you are young and have a long time horizon before retirement, time is your best friend. Time is on your side. But, you need to make time work in your favor by investing now.