One of the hardest parts of investing is that it requires us to be the one thing many of us are not: patient. As I say in my book, Money Rules, “It's sad, but true: human psychology works against the behaviors that have historically led to good long-term returns.” When we want something, we want it now; when the market is volatile, we want to protect our money right then and there. However, irrational decisions can often lose us money in the long run.
To that end, the Wall Street Journal recently published a handy guide of tips to use to prevent yourself from making irrational decisions with your investments. I like many of their tips, because they help to override our human impulses that may undermine our long-term goals. Among my favorites:
- Divide your money into “buckets.” Money for your kids' college tuition goes in one “bucket” (a 529 account, perhaps), while savings for a new car goes into a different “bucket” (a regular savings account or a short-term bond account). Separating your money into categories will help you focus on each goal you have and help prevent you from raiding one account for something it's not intended to be used for.
- Avoid volatility. If you're easily scared by a volatile market, there are two things you should do: (1) step away from the scary headlines and (2) pick funds that include in a broad mix of investments. These broader funds tend to be less volatile, even when the market is yoyo-ing faster than an amusement park ride.
- Manage your expectations. If there's a “rockstar” fund that has been performing magnificently and it suddenly takes a dip, don't bail out immediately. The Journal reports that industry data shows that the top funds can slip for three out of every ten years, so give your fund about two years to recover.
We here at SavvyMoney know that investing can be tough. If you follow these tips, it can be just a little bit easier.