Seems So Easy
Jonathan Clements | September 26, 2020
MANAGING MONEY is ridiculously simple—and unbelievably hard. Figuring out what we should do with our dollars is typically straightforward: We should save regularly, diversify broadly, rebalance occasionally and so on. Instead, the tough part is getting ourselves to do what we intellectually know is right. Take the notion of buying low and selling high.
Every investor knows that’s the goal—and yet, when the S&P 500 slumped 34% earlier this year, many folks just couldn’t bring themselves to buy stocks. For these investors, the knowledge was there, but that knowledge proved no match for the instinctual fear triggered by plunging share prices and the accompanying narratives of doom. Other examples? Here are nine basic financial strategies that many people struggle with:
1. Save diligently. What could be simpler than spending less than we earn? It’s the fundamental step on which almost all other financial success is built—and yet so many of us find it so very hard to do.
2. Rebalance occasionally. This is just a disciplined version of the buy low-sell high strategy, and many investors find it equally tough. It seems like madness to lighten up on what’s currently faring well and purchase more of what’s struggling. Yet this simple strategy keeps our portfolio’s risk level under control, while also potentially bolstering long-run results.
3. Diversify broadly. If we build well-diversified portfolios, we should always own a piece of whatever’s faring well, while inevitably ending up with some investments that currently appear to be duds. But what will the future bring? That we don’t know—but that doesn’t stop us from extrapolating the recent past into the future, leaving us dissatisfied with our diversified portfolio and the investments that have lately fared poorly. For some, owning out-of-favor investments proves too emotionally uncomfortable and they end up ditching their laggards, often just before the market cycle turns.
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Source: Seems So Easy – HumbleDollar