How To Ride Out A Rocky Stock Market Like Warren Buffett
However hard investors may try, nobody can precisely predict what the stock market will do. It’s not possible, because the stock market was designed to prevent such foresight. It’s intentionally mercurial and mysterious. There are too many variables (inflation, demographics, human psychology and behavior, yet-to-arrive breaking news, etc.) for anyone to determine what will happen tomorrow or in 10 years.
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Though none of us can say with certainty that the stock market is about to hold steady, soar, or crash, we can all be certain about one thing: The stock market will do all of these things. Because the stock market will fluctuate and, sometimes, utterly nosedive, it can be tough to always feel comfortable about your investments. But bear in mind that the best investors hold out for the long haul. Just look at Warren Buffett; he’s held tight amid serious market crashes.
How can you do the same? Here’s how you can ride out a rocky stock market like Warren Buffett.
Remember That Investing is a Marathon, Not a Sprint
Buffett stays calm and collected during market upheavals largely because he recognizes that investing is a very long game, much like an expert game of chess may be.
“Investors should recognize that building wealth is a marathon and not a series of sprints,” Robert Johnson, CFA, CAIA and CEO at Economic Index Associates.
It’s typically unwise to invest in the stock market without the intention of being in it for the long haul, which means holding steady throughout broad storms.
“I do not advocate putting money into the stock market with short-term intentions,” said Thomas Brock, CFA, CPA and expert contributor at Annuity.
“Any money invested in domestic and international stocks should be left to grow for at least a full market cycle, which typically spans five to seven years. A long-term perspective is essential to successfully accumulating wealth with this historically volatile group of assets.”
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Don’t Make Aggressive Moves in Haste; Do This Instead
In Brock’s opening, the worst thing you as a stock investor can do is hastily liquidate your positions when waters get choppy. Instead, do this:
“Maintain an adequate liquidity reserve to address unforeseen circumstances and bolster confidence,” Brock said. “This means putting at least 6 to 12 months (potentially, 12 to 24 months) of living expenses into a highly liquid savings or investment vehicle that offers you a competitive rate of return. Personally, I maintain a liquidity reserve that consists of a high-yield savings account and a government money market account, both of which offer around 5% annually.”
You should also hold a highly diverse portfolio to spread and mitigate risk.
“Diversify your stock positions using low-cost, passively-managed instruments,” Brock said. “This means efficiently taking positions in domestic stocks of all sizes, international developed market stocks and emerging market stocks.”
Unplug From the 24/7 News Cycle
Though it’s crucial to stay informed about the happenings of the economy and your investments, it’s unhealthy (both financially and mentally) to stay glued to the news 24/7, letting it sway your decision making.
“Don’t watch the 24/7 financial news networks,” Johnson said. “The 24/7 financial news makes it seem like one needs to continually make trades and adjustments in one’s portfolio to win the investment game. Nothing could be further from the truth.”
Focus on the Investment Policy Statement
Johnson also cites the importance of focusing on your investment policy statement (IPS), a document that all investors should have.
“An IPS is a written document that clearly sets out a client’s return objectives and risk tolerance over that client’s relevant time horizon, along with applicable constraints such as liquidity needs and tax circumstances,” Johnson said. “In essence, an IPS sets out the ground rules of the investment process — it is the document that guides the investment plan.”
Every IPS has a target allocation that Johnson says should include a glide path for target asset allocation changes as you age.
“All investors should have an IPS,” Johnson said. “The whole point of an IPS is to guide you through changing market conditions. It should not be changed as a result of market fluctuations. It only needs to be revised when your individual circumstances change — perhaps a divorce or other unanticipated life change.”
Take Your Mind Off it And Have A Nice Day
Perhaps the best way to ride out a rocky market is, simply, to not think about it. Have fun instead.
“Warren Buffett recommends investors ‘re-watch their favorite Super Bowl commercials, get ice cream with their kids and say hi to a friend they haven’t spoken with in a while,'” Johnson said. “If you have a long-term time horizon, this too shall pass.”
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This article originally appeared on GOBankingRates.com: How To Ride Out A Rocky Stock Market Like Warren Buffett
