So you’ve taken the smart route to wealth and decided to invest, good for you! You have probably been reading personal finance blogs for some time and also read some of the personal finance books (like Scott Pape’s The Barefoot Investor – The Only Money Guide You’ll Ever Need), so my guess would be you will probably have decided to invest in an index fund or ETF, or maybe you have just started out and signed up to Acorns! Well good on you for taking the first step! Also…

Welcome to the roller coaster!

You see the market is largely guided by something rather unpredictable, human emotion!

Whilst the market should be guided by the combined might of the tens of thousands of companies listed on the various stock exchanges around the world, (and it is, to a degree) the biggest shifts tend to come from irrational dumps and pumps by people who are either panicking or jumping on the bandwagon of the latest trend.

I can understand why this is so, it is human nature to follow the crowd, however for your peace of mind as well as your future you need to put some plans in place to ensure you don’t make any irrational decision in the heat of the moment.

The stock market is a device for transferring money from the impatient to the patient – Warren Buffett

Below are 6 strategies you can use to help you make the right decisions when times get tough and the market plummets.

1. Always have a plan – A sound investment strategy is key to not making irrational moves during a strong bear or bull market. When devising your plan make sure you (and your partner) are fully on board and do not be afraid to seek advice from a professional. In saying this it is important to review your plan yearly, however it should be rare that you are make wholesale changes as any good investment strategy will be medium to long term.
2. Dollar cost averaging – The key to dollar cost averaging is committing to investment a dollar amount each period (be it weekly, fortnightly or monthly) and buying shares at the price of the day. This means as the share price goes down you buy more shares and when it goes up you buy less. The advantages of this is that you can set a fixed amount, which will help with cash flow and you do not need to stress about trying to pick the ups and downs of a share or ETF, this is just something that you will never be able to do.
3. Don’t look at the charts everyday – If you have a solid long term investment strategy that you believe in then there is no need for you to be jumping online and checking the value of your investments every day. This can lead to reactionary trades if the market is dipping or even raising. Personally I would not be checking my portfolio any more frequently than weekly. If you are struggling with this I would recommend removing the share price apps from your phone and only checking when you are on a desktop computer.

   

4. Invest for the long term – Investing is a long term play, if you are trying to make a quick buck buying and selling you are not investing, you are gambling. When you choose an investment make sure you have bigger picture in mind and always invest in the share market for the long term, always keep this in mind. If you are nearing retirement, maybe you should be looking elsewhere to put your money.
5. Invest in companies you understand – This is some solid advice from the master investor Warren Buffett and it is advice that he himself follows. When looking to make a sound investment it is wise to look at companies with a business model that you understand, so if an event occurs that causes panic selling on the market wide and all of a sudden your companies share price plummets you will be able to make an informed decision.
6. Invest as if you were buying the whole company – Always remember what a share/stock is, it is a slice of a company, so when you buy shares you are a part owner in that business. Not all of us have copious amounts of cash laying around and can purchase entire companies like Berkshire Hathaway, however we should all be going through the same process and due diligence when we are buying even a few shares in a company. If you do this then you will have a good understanding of the fundamentals of that business and will know if you need to sell or if the market is just being affected by human emotions.

In summary, the key is to have a plan and stick to the plan. Understand the companies you are investing in so you can understand the forces that will affect the profitability and longevity of the company. Most of all be patient, investing the share market is a long term play.

The above information should not be taken as person advice, you should always consult a professional when looking to invest your money.

Do you have any tactics or techniques that you practice to avoid getting caught up in the hype in the share market? I would love to here about them in the comments below!

Cheers

TSD