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Business // Thinking Smart
David S. Chang

How To Profit In The Stock Market

If we look over the past 15 years or so, it’s easy to understand why investors have been nervous. When the tech bubble burst in 2000, the market declined by almost 50 percent over 31 months. The market rebounded the next five years to a peak in October 2007, only to lose more than 57 percent over 17 months.

As of the date of writing this article, the market has made a slow and volatile climb to an all-time high and gain of more than a 170 percent return!

With so much progress being made, many people are beginning to wonder if we’re due for a retreat. And if we do see a decline, how should we prepare in advance for it?

The truth is, no one can say for sure when the market will go down or go up. An interesting study by Bloomberg showed that the companies Wall Street analysts said to “sell” outperformed the market by 25 percent, while the stocks they said to “buy” underperformed by 7 percent. In other words, if you had followed the opposite advice of Wall Street professionals, you would have outperformed the S&P 500 by 7 percent!

Then what is the best way to make money in the stock market?

First and foremost, getting out of the market completely is not the answer. The greatest risk facing Americans today is longevity risk – running out of money. Investing in the stock market over the long term is one of the best ways to keep up with inflation and, if invested smartly, reduce your risks while maximizing returns and income.

Here are the steps to follow for long-term success in the stock market.

* Don’t try to pick stocks
* Don’t try to time the market
* Invest in a low-cost portfolio with a diversified asset allocation

According to a study by Ibbotson Associates, a portfolio’s performance is based on:

* Asset Allocation Policy – 91.5 percent
* Security Selection – 4.6 percent
* Market Timing – 1.8 percent
* Other Factors – 2.1 percent

Trying to pick the right stocks and timing the market only make up for only about 6 percent of a portfolio’s performance, yet make up a considerable amount of a portfolio’s losses! You have a greater chance of losing money than making money if you try to actively beat the stock market. In fact, over a three-year period, 90 percent of actively managed mutual funds lag behind the market. Since more than 90 percent of making money in the stock market comes from an asset allocation policy, selecting suitable investments and the right amount of them is extremely important.

A portfolio’s long-term performance is determined primarily by the percentage of investments in each class: cash, stocks, bonds and alternative investments. This helps protect your assets while maximizing growth potential. This percentage is based on your time horizon, risk tolerance, goals and financial plan.

For sample financial plans and other financial tools, visit artofthinkingsmart.com. Also visit the site for my recommended mutual funds, ETFs and alternative investments.

david@artofthinkingsmart.com

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