The last 12 months have been something of a marquee year for investors. Despite Greek debt write-downs, Spanish and Italian concerns, a handover of power in China, Japanese elections and the hullabaloo about the impending US fiscal cliff, the Australian share market has done very nicely, thank you. What if the market jumped and no-one noticed? Sure, that’s not what the headlines suggest, nor is it the feeling of most investors. As many psychology studies have shown, humans feel the pain of loss far more than we enjoy a similar gain. The result is that we bear the scars of…
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The last 12 months have been something of a marquee year for investors.
Despite Greek debt write-downs, Spanish and Italian concerns, a handover of power in China, Japanese elections and the hullabaloo about the impending US fiscal cliff, the Australian share market has done very nicely, thank you.
What if the market jumped and no-one noticed?
Sure, that’s not what the headlines suggest, nor is it the feeling of most investors. As many psychology studies have shown, humans feel the pain of loss far more than we enjoy a similar gain. The result is that we bear the scars of years past even after good times have returned.
The bad news is that if you were scared out of the market over the last couple of years, you missed out on a gain of almost 14% in the S&P / ASX 200, or 19.5% when dividends are included (both according to Capital IQ) in 2012.
Don’t try to time the markets
Of course, hindsight lets us imagine we can time the markets perfectly. We can’t, of course. Instead, at The Motley Fool we’re in the ‘time in the market, not timing the market’ camp. Investing regularly and letting the creative power of capitalism do the heavy lifting works for us.
It’s an approach decried as unsophisticated and ‘old-fashioned’, but that’s okay with us. Warren Buffett has been accused of that many times – he ignored the jibes and was proven right. We’re not comparing ourselves to the Oracle of Omaha in terms of investing results, but we’re happy to follow in his footsteps when it comes to ignoring the so-called ‘smart money’.
Back to – successful – basics
Instead, we’re going to stick to trying to do a simple thing well, rather than a complicated thing badly. There are no extra points for degree of difficulty in investing.
Here are twelve New Year’s resolutions we shared with our members:
- I will live below my means — spending less than I earn
- I will save money into a rainy-day fund so I’m ready for what life might bring
- I will invest money I don’t need for at least 3-5 years to build my nest egg
- I will regularly add to my investment account
- I will learn more about investing, taking control of my financial future
- I will invest in quality businesses, buying a slice of the company, not just a code on a screen
- I will buy shares in a company with the intention of holding them for the long term
- I will sell when my investment thesis fails, the company is overvalued or I have a better idea
- I will avoid anchoring my decisions to the price I paid for my shares
- I will remember than the market can be moody and over-react
- I will expect volatility, and I won’t let it spook me into selling
- I will let the market offer me prices (be my servant), not dictate my mood or actions (be my master)
There’s nothing difficult in there – at least in theory. The challenge comes in mastering our emotions, and acting as rationally as possible… putting those resolutions into practice.
Whether in times of extreme fear – such as we’ve seen over the past 3 or 4 years, or greed, which is sure to come when investors finally forget the pain of that time – rational decision making gives investors the best chance of success.
The seeds of the next boom (and subsequent bust) are always sown in the aftermath of the last one. Sticking to these resolutions – and making some of your own – is a good way to avoid the excesses at both the peaks and troughs of the investing cycle.
From all of us here at The Motley Fool, we wish you a successful and prosperous 2013.
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The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.