Start out small and diversify.
Many people feel paralyzed about investing, especially if they’ve invested little or nothing in the market before.
Investors are bombarded with conflicting messages about whether the stock market will continue hitting new highs or is a house of cards waiting to self-destruct. If the experts are unsure, it’s understandable that the average investor can’t decide how or when to invest.
While people don’t want to miss out on future gains, they also don’t want to look foolish by buying at record highs before a crash. But looking at it that way almost guarantees procrastination. Short-term market moves don’t matter a lot.
Many people hold a misconceived notion that you have to jump in and out of the market at the right time. Even though the market can be a roller coaster, as long as you have a long enough time horizon, it’s worth the ride.
To overcome paralysis and indecision, start out small. Investing isn’t an all or nothing decision. Putting small amounts of money to work over time reduces your market-entry risk and is an effective way to conquer investor paralysis.
Diversification reduces risk and can increase your comfort level. While large-cap US stock funds should be a core holding, they’re not the only game in town. Investors should also invest in bonds, small caps, natural resources and real estate funds and include foreign stock funds in the mix. I recommend having about 35 percent of your equities in foreign stock funds.
Developing a long-term investment strategy and maintaining your investment mix regardless of market conditions is a better way to ensure success than trying jump in and out of the market.
Besides paralysis, here are some other common cognitive traps:
Ben Sullivan, Certified Financial Planner (CFP©), is a client service and portfolio manager with Palisades Hudson in Austin, Texas. He wrote the chapter on the topic in the book “Looking Ahead: Life, Family, Wealth and Business After 55.” More information is available at www.palisadeshudson.com/book. Chapters on investor psychology and estate planning can be downloaded free.
Follow Sullivan on Twitter @BenCSullivan.
Palisades Hudson Financial Group is a fee-only financial planning firm and investment manager based Fort Lauderdale, Florida, with about $1.4 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas.