We can invest for our early retirement even in times like this where we are faced with economic uncertainty, collapse of real estate prices and turmoil in the finance services industry. To do so requires a disciplined, patient, unemotional approach to long term investing. Stick to these 7 secrets of investing for an early retirement:
1. Crises are Inevitable. You will be in a better position for early retirement if you avoid making drastic changes to your investment plan and don’t overreact to events. History has taught us that equities will continue to grow over the long term. The patient investor who remained invested during the 20 year period of 1989-2008 received an average annualized return of 8.4% per year.
2. Don’t Try to Time the Market- Investors who understand that timing the market is a loser’s game will be less prone to short term volatility and will stick to a long term investment plan for their early retirement. Studies show that the patient investor who remained invested during the entire 1989-2008 (20 year) period received the highest average annualized return of 8.4% per year. Those that missed the best 60 days over that 20 year period had a negative return.
3. Keep Fear and Greed out of your Portfolio. Attempting to time the market, abandoning markets that are out of favor, and chasing hot managers leads to self-destructive investor behavior. The long term wealth needed to build an early retirement plan requires you to control your emotions and stick to your investment plan. Over the period from 1988-2007, the average stock fund returned 11.60% annually while the average stock fund investor earned only 4.5%.
4. Focus on what you can control. Short term forecasts by the media and economists may be compelling but they do not hold real value. Don’t waste your time on the direction of the stock market or interest rates. A study by the Wall Street Journal of economists showed that their forecasts from 1982-2008 were wrong 68% of the time. Focus on having a diversified portfolio with realistic return expectations and time horizons so you can succeed in an early retirement investment plan.
5. Look for Opportunities. Most people will leave the market or abandon their investment strategy when they suffer from large losses. It is important to feel confident about the potential that exists when prices are low. Historically low prices have increased future returns and crisis creates opportunities. The -.2% average annual return from 1928-1937 was followed by a 9.3% average annual return from 1938-1947. Furthermore, these periods of recovery average 13% per year and ranged from a low of 7% per year to a high of 18% per year.
6. Short Term Under-performance will happen. Many people switch managers or mutual funds during down markets. Each time you switch you may incur fees or a taxable event. Most managers have suffered an average of 3 years of losses and still delivered excellent long term returns. If you don’t stick with them on the downside, you will never experience the high long term returns that they deliver and your early retirement goals may be set back a few more years.
7. Buy in times of pessimism and resist euphoria around investments that have recently outperformed. Following three years of stellar returns for stock funds from 1997-1999, euphoric investors added money in record amounts in 2000, just in time to experience three terrible years of returns from 2000-2002. In 2002, investors became pessimistic and withdrew money right before stocks delivered one of their best returns ever in 2003 (30%).
Expect to stick with your long term investment plan. If investing for the long term was easy, we would all be rich. Most people sabotage the best investment plans by letting emotions drive their investment choices, not sticking with their plan and being influenced by market news. If you are serious about making a plan for early retirement, you must have a disciplined approach to a long term investment plan.
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