Photo Credits: tsevis
A few months ago, I wondered whether an investment property or a dividend yielding stock is better. The result was an unanimous vote for investing in stocks. Since then, the environment drastically changed as we saw the financial crisis start to unfold and our stock portfolios subsequently losing 40% of its value.
If I were to ask the same question again, will everyone still vote for stocks? What about 6 weeks ago when we were seeing double digit declines every single day?
Chasing the Heat Mentality
Now that I think about it, the vote for stocks last time reminds me of the number one reason why we cannot gain wealth, that six inches of real estate we call our brain. We all know that in investing, we shouldn’t chase gains and invests in stocks that has already gone up too much in value, but the same type of human psychology is making us prefer stocks over real estate at the time. If we really want to combat the effects, perhaps we should seriously consider buying stocks and real estate when we really don’t want to?
I know I know, it’s obviously not as easy as that because we fear the values will go down some more. But to that I say – so what? Do you not think that the stock market or real estate will eventually go back up? Have you not seen the 100 years of historical data of the S&P 500 and the long term up trend? Even if it doesn’t go up past the highs of last year and merely gets to the level 12 months ago, that’s a 35% gain.
Be Careful Though…
Before you let me convince you to throw every dollar you have into investing, remember that while it will go back up, we really don’t know how long it will take. It could take 12 months, or it might take 5 years. It’s important to put money you need in the short and intermediate term in a safe place like an online savings account (This is extremely important, as I’m sure those who didn’t follow it can tell you after what we witnessed the past 2 months).
A Little Tip That Could Make You Millions
So how do we keep our emotions from controlling our behavior and wreaking our wealth? Easy, just make a plan. It could be as simple as committing to automatic contribution plans and forgetting about it or writing out exactly what you plan to do. Here’s an example:
I will contribute $500 a month to invest in an index fund that tracks the S&P 500.
If the market dips 5% from the month before, I will invest $550 that month. If it dips 10% or more, I will contribute $600.
Once you write it down and remember your plan, it will be much easier to stick to it because you are detaching your behavior from the actual fear of reading headlines. You are sticking to a plan that you developed out of logic and not acting on emotions.
As you can see, the plan can be quite simple but as long as you are committed, it can be quite effective.
What About You
Do you have a plan? If so, do you find that it helps? Please share so we encourage everyone to start taking steps for a better future.
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence. They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.