I once wondered whether an investment property or a dividend yielding stock is better. The result was an unanimous vote for investing in stocks.
Since then, boy has the environment drastically changed. The financial crisis unfolded with a 50%+ decline in stocks, followed by stocks multiplying during the next decade only for a pandemic to trash stocks again in a span of just one month.
If I were to ask the same question again, would everyone still vote for stocks?
Chasing the Heat Mentality
Now that I think about it, the vote for stocks last time reminds me of the number one reason why we cannot gain wealth – that six inches of real estate we call our brain. We all know that in investing we shouldn’t chase gains and invests in stocks that has already gone up too much in value. But the same type of human psychology is making us prefer stocks over real estate at the time.
If we really want to combat the effects, perhaps we should seriously consider buying stocks and real estate when we really don’t want to?
I know I know, it’s obviously not as easy as that because we fear the values will go down some more. But to that I say – so what? We all know that the stock market and real estate always eventually goes back up. Have you not seen the 100 years of historical data of the S&P 500 and the long term up trend?
Be Careful Though…
Before you let me convince you to throw every dollar you have into investing, remember that while it will always go back up, we never know how long it takes to do so. It could take 12 months or 5 years. It’s important to put money you need in the short and intermediate term in a safe place like an online savings account. This is extremely important, as I’m sure those who didn’t follow it can tell you after what they witnessed back in 2008.
A Little Tip That Could Make You Millions
So how do we keep our emotions from controlling our behavior and wreaking our wealth? Simple. Just make a plan. It could be as basic as committing to automatic contribution plans and forgetting about it or writing out exactly what you plan to do. Here’s an example:
I will contribute $500 a month to invest in an index fund that tracks the S&P 500.
If the market dips 5% from the month before, I will invest $550 that month. If it dips 10% or more, I will contribute $600.
Once you write it down and remember your plan, it will be much easier to stick to it because you are detaching your behavior from the actual fear of reading headlines. You are sticking to a plan that you developed out of logic and not acting on emotions.
As you can see, the plan can be quite simple but as long as you are committed, it can be quite effective.
Update: Steven in the comments have an even simpler plan. Instead of changing the dollar amount you put into the index fund based on market performance, just buy a set amount periodically. This way, you can totally make the contributions automatically. Set it and forget it, as he says!
I love this idea since it takes our emotions out of investing even more. Sometimes the simplest plan is the best plan of all!
What About You
Do you have a plan? If so, do you find that it helps? Please share so we encourage everyone to start taking steps for a better future.
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