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Market Investment Wisdom, Part 2

Last week we covered some of the essential investment wisdom of the world’s greatest investors. The greatest investors understand that we shouldn’t overreact to short-term fluctuations of the market. By being disciplined, sticking to your personal investment plan and avoiding destructive behavior, investors are better positioned to benefit from the long-term growth potential of the stock market.

Here are some more essential investment tips.

* “Though frustrating, stretches of disappointing results for the market are not unprecedented. History shows, however, that these difficult stretches have been followed by periods of recovery. Why? Because lower prices increase future returns.” -Christopher C. Davis, portfolio manager, Davis Advisors. History shows that after disappointing 10-year periods for the stock market, the average return for the next 10-year period is 13 percent per year! Nobody knows what the next 10 years will bring, but investors with long-term goals should look into maintaining or even adding to their stock allocation after a prolonged stretch of poor returns. It may be tempting to sell or abandon stocks, but this would be selling at the wrong time. Investors should be confident that stocks in the long term will go up after a prolonged period of bad returns. Why? Because low prices help increase future returns and opportunity.

* “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.” -Peter Lynch, legendary investor and author. When the market goes down, many investors move out of stocks with the intention of coming back in when they think it will go up. Unfortunately, this has led to disastrous results. If patient investors remained in the stock market the past 20 years, they would have received 9.2 percent per year. If these same investors, however, missed the best 30 days during this 20-year period, their investment would have remained flat! If they missed the best 60 days, they would have lost a significant amount in the market. Nobody knows when these best 30 or 60 days will be, so attempting to time the market will hurt you more than just staying in and riding out the market corrections.

* “Be fearful when others are greedy. Be greedy when others are fearful.” -Warren Buffett, legendary investor and chairman of Berkshire Hathaway. Building long-term financial wealth involves counter-emotional investment decisions. Investors want to buy when there is maximum pessimism with the market, and sell (or resist buying) when there is maximum euphoria and excitement with the market. The stock market was booming from 1997 to 1999, with record amounts of money flowing in 2000. Unfortunately, they just got in to experience terrible years of returns from 2000 to 2002. Many of the same investors sold during this downturn, only to see the market go up more than 30 percent in 2003! This happened again in 2008, when many pulled out of the stock market at the bottom, missing the subsequent double-digit returns a few years later.

The greatest investors understand that an unemotional, rational and disciplined investment approach is crucial to building long-term financial wealth.