If you think it’s easy to make money investing in stocks think twice about 2015 and beyond. Here I reveal the best kept secret of stock investing so you can make money investing and relax in the process.
Anyone could make money investing in stocks from early 2009 to late 2014. We had a bull market… up over 100%. In a bull (up) market investors large and small make money. The real secret to stock investing: once you’ve made a gain like that; don’t give it back to the next bear (down) market! I call this a secret because the big financial companies and their financial planners are unlikely to tell you this. Their job is to SELL you financial products in good markets and bad, and that’s best done by emphasizing the positive and downplaying the negative. Have you ever seen a negative commercial by a financial firm?
In a bull market investors jump on the bandwagon to make money investing in stocks. Greed prevails and this sends prices higher. Investors are afraid of missing out; especially when safe alternatives are paying close to zero in interest income. And looking at 2015, there still appear to be some good stocks and funds out there that pay dividends of 2% and more. Should you buy them now?
As a bull market matures investors tend to get complacent. After all, if you want to make money investing in stocks in 2015 you’ve got to own some, right? Investors also tend to have short memories. Preceding the beginning of this bull market, we had two BEAR markets in the previous nine years. Both lasted less than two years and resulted in losses of 50% or more. Investors don’t make money investing in stocks in a bear market. They lose money. That’s rule #1 in the real world of stock investing.
Let’s express the truth with numbers. If you have $100,000 invested (like in your 401k) and loose 50% your portfolio is now worth $50,000. To get back to $100,000 you then need to double your money. In other words, you need a gain of 100% in the next bull market to get even. This is what has happened to investors TWICE before this last bull market. The truth be told, stock investing has not been easy since the year 2000. Don’t let the next downturn take your profits away.
The time to make money investing in stocks… the time to buy aggressively is when the market is selling cheap and FEAR is the dominate emotion. Basically, stock investing is a matter of fear vs. greed and fear is the stronger emotion. Looking at it another way, it’s a matter of risk vs. profit potential. And profit potential is highest when prices are cheap, not after a five year run-up when bad news has the potential to send prices tumbling.
The history of the stock market makes one thing perfectly clear. Every few years there is bad news that sparks fear in the market and investors react by selling. There’s a time to make money investing in stocks and there’s a time to protect your profits. Don’t be complacent in 2015 and 2016. Plan ahead.
Your primary goal should be to make money investing in stocks over the long term and in 2015 you can best do this by avoiding heavy losses. We’re not talking about speculation here; we’re talking about stock investing aimed at accumulating money for longer term goals, like retirement. If you make 10% a year, your money doubles in 7 years. If periodic large losses cut your net gains to 3% a year, it will take 24 years to double your money!
Why not cut back on your stock holdings for 2015 and beyond? Then, as fear reaches a climax, you can ease back in and take advantage of low prices. If you want to make money investing in stocks over the long term, you need a good defense as well as a good offense.