What investors learn from roller coaster rides
If you have an interest in looking up obscure holidays and celebrations, you will find that August 16th is National Roller Coaster Day. As you know, a roller coaster is used as a metaphor for many areas of life – including the financial markets. As an investor, what can you learn from this thrill ride?
Here are a few suggestions:
Don’t jump off. This is pretty standard advice for all roller coaster riders – but it’s also a good recommendation for investors. Specifically, you don’t want to exit the financial markets when they turn volatile. It can be tempting to do so, because the markets do indeed experience dizzying drops from time to time. But if you jump out of the markets when they’re down, you may be on the outside when they start their climb, potentially missing out on gains.
Protect yourself. When you’re on a roller coaster, you are typically advised to keep your arms and legs inside the car to protect your extremities from dangerous contact with the track and other cars. As an investor, you also need to protect yourself from dangers such as a market downturn. If you owned just one type of asset, such as aggressive growth stocks, and a downturn occurred, you’d likely take a big hit. One of the best ways to help avoid this possibility is to diversify your holdings among stocks, bonds and other investments. Although diversification can’t guarantee a profit or protect against losses, it can help reduce the impact of volatility on your portfolio.
Keep looking forward. When you’re on a roller coaster, you don’t want to look backward. Not only could you strain your neck, but you’ll also be unprepared for the ups, downs, twists and turns that await you. When you invest, you want to keep looking forward as well. By keeping your eyes, and your focus, on your long-term goals, such as a comfortable retirement, you can be better prepared to follow a consistent strategy designed to help get you to your destination.
Don’t bring extra baggage. For obvious reasons, it’s not a good idea to bring any loose or extra baggage inside a roller coaster car that may have you going upside down at 90 or so miles per hour. As an investor, you don’t want to be saddled with any extra “baggage,” either – and one of the biggest sources of this baggage is unrealistic expectations. If you think you will earn double-digit returns every year, you will likely be disappointed — and your disappointment could lead you to make unwise decisions, such as constantly buying and selling investments to improve your performance. This type of activity is expensive, time-consuming and usually futile. So, when you invest, maintain realistic expectations – it can help you stay on track toward your goals.
By following these basic guidelines for roller coasters, you’ll enjoy a safer ride. And by observing similar rules for investing, you can help make your investment “journey” smoother — and less scary.
This article was written by Edward Jones for use by your local Edward Jones Financial Adviser. Douglas J. Drost CFP Financial Adviser for Edward Jones, 2262 Reno Highway.