Expert: Here's a good way of 'taking emotion out' of investing
Retreat, rally, and repeat. That’s what's been happening to global stock markets as the Russian invasion of Ukraine continues. Inflation is racing, and gas prices have accelerated. The world is on tenterhooks.
It’s hard for investors to stay sanguine. Dollar-cost averaging and diversification are key, Marguerita M. Cheng, a Certified Financial Planner and CEO at Blue Ocean Global Wealth, in Gaithersburg, Md., recently told Yahoo Live (video above).
“It is very difficult to time the markets,” Cheng said. “You may know when to get out of the market, but you may not know when to get back in. So it's very hard to be right twice.”
Taking the emotion out of investing
The magic of the dollar-cost averaging approach to investing is you set up a system that consistently puts money into the stock market on a regular schedule rain or shine. No drama.
“What I absolutely love about dollar-cost averaging is it is a way of taking emotion out,” Cheng said. “It just basically means that you are investing a specific amount of money in the market at specific times.”
Sometimes you buy high, when stocks are pricey, and sometimes you buy low, when stocks are cheap. The timing has nothing to do with the daily swings in the market.
That means there’s no reason for hand-wringing when the market gets jittery because when you're investing constantly whether the market is up or down, it creates a natural balance that smooths performance out over the long-run.
“Believe it or not, many of us are doing it, when we participate in our employer-sponsored retirement plans, or we're saving money in our children's 529 plans, or we have automatic contributions to a Roth IRA or a traditional IRA.” Cheng said. "And it just means that we are investing on the highs, as well as the lows.”
Cheng is realistic.
“You may not be happy to see everything go down,”she said. “I don't want to misrepresent. However, if you are a long-term investor, then this is an opportunity to buy on that dip. So I think dollar-cost averaging can be very helpful because you are not putting everything in the market all at once, only to log on to your smart device and see everything go down.”
Build a diversified portfolio
The second piece of an investment strategy that can provide peace of mind for investors when things seem out of whack is to build a diversified portfolio. But how do you divide up the pie, so to speak?
“What I tell clients is it depends on your situation,” Cheng said. “Not just your financial situation, but your personal situation.”
So, say that you are 70, and in two years, you’ll need to start taking required minimum distributions from your retirement accounts. “You want to make sure that you have adequate liquidity,” she said.
“It is important that investors have cash, stocks, and bonds, and they could be individual stocks and bonds, mutual funds or ETFs, '' she said. “That's why diversification is important because each one of these pieces of your pie serves a special purpose.”
First up, “you need cash for liquidity,” Chang advised. “However, you don't want to put everything in cash because while you can access your cash, it does have another type of risk, which is inflation risk.”
One of the best ways to combat inflation is with stocks or stock mutual funds. The stock market's average annual gain outpaces inflation over the long run. “Stocks have a market risk, but for long-term investors, you do want to make sure that you stay invested in stocks,” Chang said. “And by the way, everyone, even someone who is retired today, is a long-term investor.”
Bonds have to be in the mix, too. “Bonds do not make you rich, but they can help you stay rich,” she said. “They will help level out the volatility.”
Commodities, too, “can play a special role in people's portfolios because they may provide additional levels of diversification,” Chang said. But it depends on the individual situation. “It's not that gold bars aren't valuable, but you want to make sure that everything aligns with your specific time frame,” Chang said.
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon
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