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Four Investing Rules for ANY Market Environment

Ten years ago, if you had asked 100 people what it takes to be a successful investor, the vast majority of them would have said: “pick the right stocks.” A few years later, the answers would have been very diverse, if you were able to get an answer at all. These days, the debate between active investing and a more passive, index-based approach gets a lot of attention. With all of these changes in expert opinions and strategy, how is the everyday investor supposed to function? Well, fortunately, there are a few basic rules of investing that can and should be used in any market environment.

1. Have a Plan

Putting money aside for the future is great, but without an underlying plan, it won’t get you where you want to go. What are the things you want to accomplish in life? What financial resources will you need to reach those goals? A sound financial plan can provide a clear understanding of how much you need to invest and the returns that are necessary to help you achieve your goals. More importantly, your investing strategy can be tailored to fit your unique financial situation, time horizon and tolerance for market risk.

With specific goals for savings and portfolio growth, your whole perspective on the markets will change. Instead of chasing the S&P 500 or trying to find the next “home run” tech company, you can focus on meeting or exceeding your own objectives for long-term portfolio growth, based on a solid foundation for financial decision-making.

2. Build a Resilient Portfolio

A resilient portfolio is well diversified and guided by an underlying asset allocation strategy. Diversification is about spreading your investment dollars across several asset classes, and multiple assets within each class, as a way of reducing overall portfolio risk. Mutual funds are a wonderful diversification tool, because they are required to do exactly those things.

An asset allocation strategy determines what portion of your total portfolio will be placed in each of the major asset classes, such as stocks, bonds, cash or alternative investments. Research in the 1990s showed that more than 90% of the change in portfolio returns can be attributed to asset allocation decisions. Not stock picking. Not market timing. A good asset allocation strategy is a natural outcome of the planning process, and should be at the core of every investment portfolio.

3. Aggressively Manage Expenses and Taxes

Expenses and fees are a hidden drag on your returns, and can have a huge impact on the value of your portfolio over a long time horizon. Actively managed portfolios incur higher expenses and fees than passive or index-based portfolios, and research has shown that active management does not generate superior returns over time. But we can improve portfolio performance today by avoiding sales charges, selecting low-cost index mutual funds and keeping other expenses and fees to a minimum.

Like everything else in life, taxes can have quite an impact on the value of our investments. Tax-qualified savings plans provide a tax benefit today, but they require payment of those taxes the future, and bring some complexity that must be managed. When it comes time to draw on your savings in retirement, a tax-efficient distribution strategy can really stretch the longevity of your portfolio.

4. Have a Steady Hand

Unfortunately, human nature tends to work against us when it comes to investing. We are attracted to certain investments when they have done very well, and we want to get away from those that are performing poorly. This mentality does not fit with the “buy low, sell high” philosophy that is essential for investing success. Your portfolio is most vulnerable when you make emotional decisions about your investments. If you’ve done the legwork, and your investments are supported by a sound plan and investing strategy, you should have nothing to worry about.

The markets will always have ups and downs, and “expert” opinions will continue to take investors in new directions. With an approach based on these four keys of successful investing, you’ll be better prepared for the ride.

Kevin Fix