“Knowledge isn’t power, applied knowledge is power.”
― E.T. The Hip Hop Preacher
As 2018 winds down most of us will be solely focused on the holidays, gift-wrapping, and family gatherings. And despite the much anticipated jump in our spending, the majority of us won’t begin to count the costs of our holiday shopping until after the new year. However, when it comes to your investment strategy, now is actually the ideal time to do some necessary maintenance and look at your overall performance versus the market. Below are some relatively simple, yet often overlooked, strategies we can all take advantage of as the year is coming to a close.
#1) Use Dollar-Cost Averaging
One of the main strategies that investors fail to take full advantage of is the technique of financial automation. This practice of setting up automatic financial transactions is usually a no-brainer when it comes to paying our monthly Amazon and Netflix memberships. So why not apply the same logic to investing in the market where these same companies are traded each and every day? In the same way that we automate our monthly bills we can also automate our investments and set up predetermined amounts to invest each month or pay period. One example of this strategy is the use of an employer’s retirement plan such as 401(k) or 403(b). Using such a plan allows you to grow your investment portfolio by making regular contributions each paycheck period. Furthermore, by increasing your regular monthly contributions through dollar-cost averaging, you can easily position yourself to buy more when the market is low and buy less when the market is high.
#2) Use Asset Allocation
For most people the demands of our life such as our jobs and kids, don’t leave us the time or emotional capacity to master the art of investing. In fact, a recent 2017 study by Dalbar, Inc., found that the average investor underperforms terribly against the market due to their own emotional biases. Said differently, most people who try to time the market by buying low and selling high actually end up doing the exact opposite; buying their investments high and selling them low. Even more troublesome is the fact that while the overall market saw returns of close to 12%, the average investor only saw slightly above a 7% return on their equities. All of this makes a strong case that most people would do far better by investing through asset allocation as opposed to market timing. By using this much simpler strategy you can opt to select from various asset classes which are measured against a market index or benchmark. For example, Large-Cap, Mid-Cap, and Small-Cap investment funds each allow you to invest through an asset allocation, as does most age-based and life-cycle funds. If you’re unsure how to go about setting up your portfolio to utilize this strategy seek help from a trusted investment adviser who is licensed and knowledgeable.
#3) Use Portfolio Rebalancing
This third relatively-simple strategy might actually involve the least amount of work on the investor’s part. All that it involves is simply selecting the automatic “Rebalance” feature on your investment portfolio. What this ultimately allows you (the investor) to do is return to your original asset mix by buying or selling off assets as needed. As an example of this strategy let’s say you desire an asset allocation of 50% stocks and 50% bonds. But due to market performance your investment portfolio has shifted to a 70/30 percentage mix over the course of the year. In this instance portfolio rebalancing would allow you to automatically return to your 50/50 percentage mix while minimizing a significant portion of risk in the process. According to Investopedia, it’s generally suggested that investors use the portfolio rebalancing option at least annually. So although it’s late in the year currently, now may be the ideal time to consider rebalancing so if you haven’t already.
The world of investing is by no means easy to navigate or master. However, we must not let that deter us from learning and applying such simple strategies to build up our investment knowledge. When it’s all said and done your financial well-being will depend more on your own level of commitment than on anyone else’s. And that’s as good of a reason as any not to leave your investment strategy to luck or chance.