If you read my post about investing now, I wonder how you felt at the end of it. Since I didn’t get a lot of comments, I called a buddy of mine to seek feedback. As it turned out his main comment was that he felt the post was too bossy.

Crap! not what I was expecting to hear but perception is reality.

He acknowledged the information and the numbers supported the case for starting to invest early but shared additional context.

How do you set a robust and sustainable investment strategy that minimizes the chance of making costly mistakes? 

In our case, the list is quite large and would make a pretty lengthy post. Instead of being too specific, let’s focus on key themes.

Before we get into it, please remember that the investment decisions you make depend on how much you know about the choices you have today, what you hope to achieve by investing and how much risk you can tolerate.

If you make those decisions as part of a well-thought-out strategy for reaching specific financial goals you’ll have a better chance of achieving financial success.

Without further ado, let’s discuss some of our investing principles.

Stay The Course

Your strategy should always be aligned with your personal and financial goals. Flexibility is important; however, thinking long-term should help you stay the course.

The market will do what it does. You will experience unrealized losses in portfolio value (assuming you don’t panic and sell at a lot point) but as long as you remained calmed and in sync with your strategy, you’ll be alright.

If you can’t stomach seeing your portfolio drop in value then you shouldn’t invest in the stock market. It could be tempting to sell or pause until the market recovers but remember that a market drop is a great opportunity to buy stocks at a discount.

Think about the following quote by Warren Buffet and let it guide you through the roller coaster of emotions that come with investing.

“Be fearful when others are greedy and be greedy when others are fearful”.  Warren Buffet

Avoid Individual Stocks

Think about Las Vegas … just saying the name of the city sounds sexy, right?. What’s even sexier is the idea about gambling and hitting a jackpot playing the first game you come across.

Having that mindset is your first mistake. The second is lying to yourself and believing the odds are in your favor. A third one might be self-denial.

It’s funny but we have friends that go to Las Vegas and they always brag about how much money they made but never how much they lost. I’m almost 100% sure once they do the math, the answer won’t be pretty.

When it comes to buying individual stocks for some reason it feels the same way. There are investment advisors out there and their job is to spend hours, days, months, and years doing research and analyzing companies in hopes of beating the market.

Yeah, they might be able to do it year 1, 2, or even 3 but history has shown that these guys who we tend to refer to as “experts” end up underperforming the market in the long run.

If this is the case why bother investing in individual stocks? The only thing I can think of is that, just like Las Vegas, there’s a thrill around the idea of betting on a winner so that we earn bragging rights. In addition, it’s just sexier than talking about a boring investing strategy focused on passively managed index funds.

Despite this, we opened an account at Robinhood. We have less than 3% of our portfolio with 4 stocks that have performed relatively well at 17% from its opening date. The S&P 500 has returned ~16% during the same timeframe so why bother?

Do Not Attempt Timing The Market

As always, let’s start with the definition:

“The strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of the market or economic conditions resulting from technical or fundamental analysis. This is an investment strategy based on the outlook for an aggregate market, rather than for a particular financial asset”. Wikipedia.com

In short, we are talking about predicting two (2) points in time.

1. High: so that you can sell stocks.
2. Low: so that you can buy stocks at a discount.

Active traders believe they can accurately predict the future direction of the stock market using timing algorithms; however, they tend to underperform those who remain invested and simply stay the course.

We don’t have the time or desire to watch the market on a daily basis. Instead, we’ve automated investing via dollar-cost-averaging (DCA).

Unless you have a crystal ball, just be aware of your risk tolerance and pick a strategy that works for you.

Acknowledge Your Emotions But Be Careful

We discovered the Financial Independence community in 2015. Aside from education one of our first steps was to open a brokerage account at Betterment. At the time, we didn’t know DCA so we opened our account and invested a lump sum. Soon after, the market experienced a drop and we saw the value of our portfolio come down $7K in a matter of months.

We weren’t happy but we kept telling ourselves … “we haven’t lost any money is just the shares we bought have dropped in price”.

Some of the podcasts I had listened to, kind of helped us stay the course and as a result, we kept buying more during this semi-bear market.

History has shown that as long as you have discipline and stick to your plan (assuming is a well-thought-out one based on your goals) you’ll be fine. Today, I’m happy to say the negative numbers turned positive and the numbers look good!.

Please remember that it is when you sell that you’ll realize capital gains or losses until then it’s all unrealized

Final Thoughts

• Once you develop an investment strategy to meet your financial goals stick to it.
• Forget about picking individual stocks and think about passively managed low-cost index funds.
• Forget about timing the market and start investing now.
• Don’t let your emotions get in the way of reaching your goals.

Until next time … JJ