As the stock and bond markets have turned down this year, we thought this was a good time to revisit the secrets to successful investing. George F Baker summed them up admirably more than a century ago: To make money in stocks you must have "the vision to see them, the courage to buy them, and the patience to hold them." In times like these, it is the third that is the rarest.
If the bear market still leaves you worried, here are a few things to keep in mind:
• Losses are only permanent once you sell. Fluctuation in prices is normal and expected. The key is not to focus on short-term changes, but take the long view.
• It isn't realistic to expect to "time the markets." Selling at the top and buying at the bottom sounds great, but no one knows when those moments arrive. People who try this generally fail to make money. There is no magic formula or system for market timing.
• Market movements are based on emotions, namely fear and greed. They can't be predicted with the yield curve or the 50-day moving average. It's a simple case of supply and demand. Once all the nervous investors exit, demand for stocks will recover because there will be more buyers than sellers.
• Be aware of cognitive biases. It is normal for the human mind to perceive losses as greater than equivalent gains. So if you buy a stock for $100, it goes up in price to $120, but then goes back to $100, the $20 loss feels irrationally worse than the $20 gain felt positive. An investor in this case feels like he lost something, whereas an investor whose stock stayed steady at $100 does not – even though they both have the same returns. Thinking rationally, rather than emotionally, can put things in perspective.
• We aren't trying to get rich quickly. We're happy to have delivered long-term returns of 11% per year. As the past few years have far exceeded this mark, it's neither surprising nor concerning that stock prices are falling back to earth.
• And finally, you don't need to check your investments every day. Studies show this leads to needless worry and bad decisions. We are on top of things every day so you don't have to be. Once a month or once a quarter is plenty for long-term investors.