By Rob Bridgers
There’s a theory on Wall Street that goes something like this: If you follow the crowd and buy the hot investment of the day, chances are you’ll be scooping up shares when most others are about to sell. This natural “herd instinct” of buying when everyone is euphoric may mean you’ve entered the game too late and are buying at the wrong time.
Investors often jump in at the wrong time because they’re worried about what others are doing instead of focusing on good old-fashioned fundamentals such as a company’s earning potential and its management.
History continually shows us that when individuals choose investments without a prudent basis for doing so, they often wind up losing money that can take many years to recover. We saw this from 1998-2000, when investors drove the NASDAQ composite over 5,000 — only to see it fall to less than 2,000 over the following year.
History has also shown that when individuals avoid investments because the popular thinking is to steer clear of them, opportunities are often overlooked. We saw this in early 1982, when interest rates were high and companies had a difficult time impressing analysts with their earning potential. That period proved to be the beginning of a bull market that lasted more than 15 years.
In response to market downturns, some investors shift a greater percentage of their assets to liquid investments. Time and again, this strategy has also proven to be a mistake.
Keep in mind that, over its history, the stock market has experienced nearly twice as many bullish periods as bearish periods. And while past performance is no guarantee of future investment results, the stock market has bounced back from every major market downturn to date.
When times get tough for stocks, we generally recommend that you maintain your confidence in their long-term growth potential and use these simple strategies:
• Reduce your cost by averaging down. If one of your stocks declines in value, but the underlying business still appears sound, consider buying more shares. You will reduce your overall cost basis; you do, of course, increase your losses should the stock value continue to fall. A periodic investment plan such as dollar cost averaging does not assure a profit or protect against a loss in declining markets.
• Stay diversified. Keep your assets spread among investments which have historically performed differently under the same market conditions. Profits from appreciated investments can help offset losses from any losing investments.
• Stay focused on your long-term goal. Don’t try to avoid the downturn by jumping out of the market. No one can accurately predict when it will rebound. Remembering why you invested in the first place will help you stay calm during times of market uncertainty.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
This article was written by Wells Fargo Advisors and provided courtesy of Rob Bridgers, Financial Advisor in Beaufort at 843-524-1114.
Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE.
Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.