As an investor, you may sometime wonder what on earth is going on in the financial world. One day, the stock market is down 200 points; the next day, it's up 300. One day, a scandal rocks a company; the next day, another firm declares a poor earnings report.
There's no smooth route to follow, but you can help smooth out the journey by observing these "rules of the road":
• Create a plan. You can waste time, effort and money through haphazard investing. Create a plan that defines your long-term goals and establishes a strategy to achieve them, considering your individual tolerance for risk and your time horizon.
• Take action. The best plan is useless unless implemented. Once you've set a course of action, follow through. Don't wait for "time to be right" before you invest; you can always find excuses to delay. The best time to start is right now.
• Stay invested. When the market is "hot," it's easy for people to keep investing. It takes far more courage to continue investing during a long bear market. And yet, it's essential to stay invested, through good times and bad. Ultimately, the long-term performance of the investments you have chosen will have far more impact on your portfolio's success than the daily, inevitable price fluctuations.
• Look for quality. Persistence in investing, by itself, isn't enough to help you achieve long-term goals. You also need to invest in quality. Look for stocks of companies with solid track records, strong management teams, competitive products and well-defined business plans. You'll experience ups and downs even in quality stocks, but if you hold them over time, you'll greatly increase your prospects for success.
• Diversify your holdings. During any given market environment, some investments will do well while others will not. You could try to pick the winners, but that's almost impossible to do consistently. You'll be much better off diversifying your dollars among a range of high-quality stocks, bonds, mutual funds, government securities and other vehicles. By staying diversified, you'll help cushion yourself against downturns affecting just one type of investment, and you'll multiply opportunities of benefiting from assets performing well.
• Review your plan. Annually review investment plans and strategies. Your life will evolve — new job, new house, new children, etc. — and you may need to adjust plans to accommodate these changes. If some of your investments no longer suit your needs, find other opportunities. A qualified financial professional can help evaluate your situation and make recommendations on rebalancing your portfolio.
There's nothing magic, or complex, about these "rules for the road."
However, to follow these guidelines, you'll need patience and perseverance. If you have these traits, you're well prepared for a fulfilling investment journey.
Joe Faulk is a financial adviser.