Sponsored

5 Investment Strategies that Can Outlast Market Spikes

“Once again, market fluctuations are messing with average investors’ minds,” says J.D.

You’re familiar with the saying “If it seems too good to be true, it probably is?”

Just like any other scheme to “get rich quick”, attempting to buy low and sell high based on intermittent fluctuations in the stock market—also known as “market timing”—is almost always a losing proposition over the long term for the investor. Studies have repeatedly shown that those who attempt to align their investments with short-term fluctuations earn less than those who stay in over the long haul.

“Once again, market fluctuations are messing with average investors’ minds,” says J.D. Roth, author of “Your Money: The Missing Manual” in Entrepreneur. “They panic and sell when prices drop, then fall victim to what Alan Greenspan in 1996 called ‘irrational exuberance’ and buy when prices soar. That's a sure way to lose money.”

The truth is that even the most stellar investment advisor lacks a crystal ball into the future, and can only make recommendations based on historical research, industry guidelines, and experience. Unfortunately, past performance in the stock market is not, at all, an indicator of future performance.

So what are some better guidelines for investing in the stock market? Consider the following sound strategies, built on the mounds evidence saying market timing doesn’t work as a long-term strategy:

1. Establish a long-term plan.

Set clear goals and objectives such as funding children’s college educations or investing for your own retirement. An advisor can help you evaluate risks, decide on asset allocation and set benchmarks for success while minimizing risk.

2. Use dollar-cost averaging.

Instead of trading when you think it’s the right time, the principle of dollar-cost averaging (DCA) says to invest a fixed dollar amount at predetermined intervals. The result is that you’ll end up buying less shares when prices are high and more shares when prices are low.

The advantage of dollar-cost averaging is that you put your money into the market earlier—increasing the likelihood of price change—rather than holding onto cash until you think prices are low. Regardless of whether you have a flat, positive, or negative price return, if your investments earn dividends, dollar-cost averaging is a useful strategy for earning dividend returns.

3. Ride the market by tracking an index and optimize your costs.

Trying to achieve alpha—i.e. beating the market with price returns—isn’t necessarily the most evidence-based way of getting the highest returns over time, especially looking at your returns net of costs and taxes.

By investing in funds that largely track a market index (index funds), historical results show that the lower fees typical of index funds and the long-term gains often out-perform actively managed funds with higher fees. Investors should always focus on what they take home over the long-term after fees and taxes. Looking purely at the price return can lead to lower than expected results.

4. Be aware of tax implications.

A major reason why investors should lean on professional support in today’s world is so that they can optimize their investments to lower taxes. Specifically, how assets are located within tax-advantaged and taxable accounts can be managed to lower your tax liability. Also, investment losses can be “harvested” via a process called “tax-loss harvesting,” and that’s generally a process many investors cannot do themselves.

Finally, any time you want to reinvest dividends or have reason to switch to a different investment, there are ways to make regular transactions as tax-efficient as possible. The same goes for making your eventual withdrawal. This kind of back-office tax work can have a major impact on how much you, as an investor, keep from your investment, so it’s important to find the right solution—whether that’s a financial advisor or learning to do it yourself.

5. Stay skeptical.

When it comes to outlasting a spike in the market, any investor should be aware of their own biases and behaviors. Pay little attention to financial TV shows and other media reports that hype short-term fluctuations. And be cognizant of the speaker’s motivation. Those who think they have a real get-rich-quick scheme are unlikely to share it with others.

Above all, don’t let uncertainty stop you from investing. If you look back all the way to 1926, keeping your money in cash/cash equivalents has underperformed both bonds and stocks. The key thing is to just get invested.

Betterment optimizes its technology to help you make informed decisions in your investment strategy. Founded in 2008 the company manages $10 billion in assets. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Betterment’s charges and expenses. Betterment sponsored this article for Kiplinger.com. Visit Betterment.com for more information.

This content was provided by Betterment. Kiplinger is not affiliated with and does not endorse the company or products mentioned above.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your stimulus checks.
February 19, 2021
Want More Tax-Free Retirement Income? One Man’s Whole Life Decision
life insurance

Want More Tax-Free Retirement Income? One Man’s Whole Life Decision

Whole life insurance might not be something that’s on your retirement planning radar, but for this client, here’s how it served his need to control ta…
February 23, 2021
The Current Plan for $1,400 Checks
Coronavirus and Your Money

The Current Plan for $1,400 Checks

Here's what you need to know about the stimulus check plan currently being considered in Congress for President Biden's COVID-relief package.
February 18, 2021

Recommended

33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
February 24, 2021
18 States With Scary Death Taxes
inheritance

18 States With Scary Death Taxes

Federal estate taxes are no longer a problem for all but the extremely wealthy, but several states have their own estate taxes and inheritance taxes t…
January 24, 2021
Are There Cracks in Your Pension Plan?
retirement

Are There Cracks in Your Pension Plan?

You're counting on pension benefits in retirement. But how secure is your pension plan? We offer some guidance, including a pension calculator, to hel…
December 28, 2020
Doug Glanville on Race, Sports — and Personal Finance
personal finance

Doug Glanville on Race, Sports — and Personal Finance

Kiplinger contributor (and former Major League Baseball player) Doug Glanville shares insights from years playing the game — and investing. Also, what…
December 22, 2020