The Stock Market is a Massive Auction
For every buyer, there has to be a seller. One side thinks the stock will go up while the other side thinks it will go down.
The market consists of thousands of participants that trade billions of dollars daily. Stock prices reflect all publicly available information.
Therefore, prices change very quickly when new information is released about a company or economic conditions change in an industry.
Markets don’t always behave rationally, meaning there can be a lot of volatility and speculation around certain events.
The point here is that the market does a good job at pricing securities based on new information. Prices adjust when new information becomes available. This means you can expect a fair price.
If you think the market is wrong you are basically saying you have better information or are smarter than the market as a whole. You can place trust in the market based on this concept. This can help reduce stress around if you’re getting a good deal or not.
Risk and Reward are Related
The expectation when investing in companies is to get a positive return.
That said, there is no such thing as a free lunch, meaning there are no guarantees. The risk of loss must be assumed accordingly and can be greater in some investments than others.
Risk and reward are related so the more risk you take the more you will expect to be compensated. The market price fluctuation and risk of loss may be greater as well.
The point is to understand that certain parts of the market have more risk than others. This may or may not benefit you. A good question to ask yourself is: do you want to swing for the fences?
Achieving Good Results with Diversification
One of the best things you can do for your portfolio is to diversify globally. Think of it this way – Do you want to own a single house, a neighborhood, or all the houses in all the neighborhoods across the world?
If a storm comes and destroys your only house this can be financially devastaing. If you own all the houses and multiple neighborhoods are destroyed you’re going to be in a better position than you would have been with only a few houses.
The same concept applies to investing in stocks and bonds.
Time and Staying Invested in the Stock Market
If you look at historical stock market data, you’ll find that time has rewarded long-term investors. If you stay invested over extended periods of time this will increase your likelihood of success.
Missing the top-performing days can cut your returns in half. Click here to see how reacting can hurt performance.
This example shows the impact of missing out on the best 1 day, 5 days, 15 days, and 25 days during a 50-year period of the S&P 500.
Don’t try to outguess the market or sit on the sidelines. This concept confidently allows you to stay the course and be positioned to capture the days that outperform. This will ultimately benefit your portfolio.
Implement a dollar-cost average strategy into a globally diversified portfolio so you don’t have to worry about picking individual stocks or timing the market. This helps you manage risk and stay diligent with your overall investment strategy.
Consistently investing allows you to purchase more shares when the market is down. You can think of this as buying stocks on sale.
Rebalancing Your Portfolio
Rebalancing your portfolio periodically is another form of managing risk.
The first place to start is to have defined percentages of different asset classes in your portfolio. For example, you have 80% stocks and 20% bonds that each have asset classes inside of them.
Markets fluctuate allowing you to sell and buy different asset classes to bring your portfolio back to its intended strategy. This helps manage risk and forces a buy-low and sell-high strategy.
These concepts allow you to take the guesswork out of investing. This can bring peace of mind and confidence into your investment strategy.
In summary, you can develop an investment strategy by focusing on diversification. Stay invested for as long as you can to increase your odds of capturing high-performing days.
The best time to buy stocks and invest in the market is yesterday. The next best time is now by sticking to a consistent savings plan.