“Be fearful when people are greedy, and greedy when others are fearful” – a fantastic quote from Warren Buffett (a master of his trade in investing).
What does this mean?
By investing in the stock market, along with other assets, the stock price will go up and down.
If you are a trader you pay attention to these fluctuations on a second/minute/day basis but if you are a long term investor then you should only do this over years/decades.
I would highly recommend you familiarise yourself with how the economy works and what debt cycles are by watching this video the Ray Dalio – the economic machine:
Sometimes there is a massive economic reset and is usually preceded by a ‘bubble’ in the markets.
When markets are doing very well, there is hysteria and mania amongst investors and people say ‘it’s different this time, there is no bubble’ and everyone is buying stocks at a very high and overvalued price.
This is when Buffett recommends you either hold off on buying more, review your portfolio and re-allocate to less risky assets.
You are being sensible and fearful that the bubble will pop at some point in the near future, while others are being greedy and in denial that prices will ever go down.
Time to sell.
When the market then corrects and enters a bear market (i.e. the prices start doing down – as opposed to a bull market where prices go up) then stocks and assets become cheaper.
Most people see this as a bad thing, whereas in actual fact, it is a good thing if you are in the position to buy.
When people are fearful that prices will drop further, take this opportunity to be greedy and buy stocks/other assets when they are ‘on sale’ / at a discount.
Buy low; Sell high
What’s crazy is that us humans do the opposite.
When people see the stock price of Apple rocketing, they get FOMO and jump in even if it is very expensive.
Equally, when they see the price of Skype plummeting, they sell because they’re worried it’ll go lower.
Madness! One should do the exact opposite: buy low + sell high.
That is the name of the game.
We like examples, don’t we?!
Just imagine you walk into a car dealer shop and want to purchase a new car.
The saleswoman offers you the car at a discount but you decline and agree to purchase the same car at a higher price because it keeps going up….sound familiar?
Sometimes by taking stock market behaviour out of context, it highlights the idiocracy of human behaviour!
Alas, this is common practice and unlikely to change anytime soon but hopefully now after reading this blog you shall be better equipped to deal with market oscillations.
A simple strategy
How do you know when the market will go up and when it will go down?
Your guess is as good as mine!!!
If I knew, I would be sitting on my own private island right now swimming in dollars!
Sometimes the best investment strategy is the most boring: set and forget.
Adopt dollar-cost averaging or pound-cost averaging strategy, review your portfolio annually and leave it for a decade.
That is a sure way to let compound interest work it’s magic and get you a healthy return overall.
Compound interest is effectively gaining interest on top of the annual interest you make on your portfolio so this increases your annual returns exponentially over years.
It’s why Einstein called it the 8th wonder of the world.
Don’t believe me? Look it up.
Back to it: dollar/pound-cost averaging is when you set up a fixed direct debit from your bank account and have a set amount leave your current account to your investment account every month.
That way it takes the emotion out of it, as you don’t have to worry what the stock prices are because it doesn’t matter – the money is going to leave your account anyway.
Sometimes that £100, for example, will stretch further and buy more stocks when the market is down (stocks are cheaper) and will buy less stocks when the market is up. Simples!
This way is very effective for beginner investors because then you don’t have to track the market, you can sleep well at night and it prevents you from making silly mistakes.
Your emotions are your own worst enemy when it comes to investing.
“The best investors forget” – another great quote from the Money Maven podcast (I believe it’s episode #207)….give it a listen!
Once you have found an investment platform you like – see my post on Just Do It for help on this – set up a direct debit.
Then forget about it.
I will cover the importance of diversification and the other asset classes out there.
Facial ageing can begin as early as your 20’s so start slapping that SPF 50 sooner rather than later and you’ll thank me when you’re 50.
This blog is for educational purposes only and should not be construed as financial advice. It is purely opinion-based.