There’s no shortage of methodologies out there for people who want to invest or trade in the markets.

Need for an Investment Philosophy
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Some methods call for buying and selling according to a set of technical signals. Others use fundamentals, such as sales and earnings growth, as the buy-sell triggers. Others would have you buying market laggards and watching them appreciate before selling and reinvesting the proceeds in the next batch of beaten-down stocks.

It’s not unlike the health and fitness arena. Some advocates recommend mostly cardio, others mostly resistance training. Some latch onto a particular activity such as CrossFit, while others loudly decry the same activity and proclaim some other fitness trend the clear choice.

Retirement investors are best served by focusing on the long-term, not short-term market movements. That’s not to say that investing doesn’t have its scary moments. Anyone who had money in the market in 2008 probably recalls that visceral sense of fear.

Many investors extrapolate that to the present day. While not everyone immediately sells as markets become volatile, a sense of panic is not uncommon. It’s not easy to ignore the urge to do something – anything – to protect capital on days of heavy-volume downside trading.

That’s why it’s so important to have a plan you stick with, through thick and thin, no matter what the market does.

It’s crucial to have a comprehensive financial plan that includes your investing roadmap. Once you have that guide, you determine your investment philosophy. This will help you remain disciplined throughout bull markets, bear markets, volatility, and those times when some asset classes are rising, but others show declines. It helps you stick to your plan during times of political turmoil, economic recessions, or whatever crisis seems poised to derail your best-laid plans.

World events and market movements are outside every investor’s control. The political landscape, both in the U.S. and overseas, provides unlimited examples of that concept.

One notable illustration involves people who sold out in recent presidential election years because they did not like the election results. This happens with investors on both sides of the political aisle. In those cases, those who cashed out usually regretted the decision, as market activity is not necessarily correlated to the party in power or the actions of any particular president.

Investors with a longer-term perspective are generally less prone to emotion-driven decisions. A properly allocated portfolio contains the right mix of equity and fixed-income asset classes to give an investor the best chance of a successful outcome. For most people, that means living a comfortable retirement and not running out of money.

Unfortunately, many investors lack this clarity. They lack a philosophy that guides their investment decisions and is at the mercy of their emotions. That’s no way to invest in your future. Not only do you have to be right when you time your buying decisions, but you have to be right when you re-invest. It’s highly unlikely that anybody can consistently be correct on both those counts.

A proper investment philosophy is based on an understanding of markets. At its most basic, stocks return more than bonds. Stocks are also riskier, but taking that risk is how investors get their required return.

Understand how much return you need. What kind of income will fund your retirement needs, and what level of portfolio appreciation will accomplish that? There’s a lot more to it than holding “winning” stocks, although many trading methodologies begin and end with that premise.

Your investment philosophy also means choosing a strategy and sticking to it. Passive or index investing means you own baskets of stocks and bonds that track a domestic or international index, such as the S&P 500 or the Morgan Stanley Capital International All Country World Index.

There are many other widely used indexes on the stock and bond sides, as well. Your philosophy is to simply capture broad market returns, not try to pick winners.

Sticking to your philosophy means avoiding emotion-driven buy-and-sell decisions, and staying with your predetermined allocation no matter what the market does. The very point of allocating according to a plan is to avoid shuffling in and out of investments on a whim.

If your investment plan incorporates expected returns, based on risk levels and historical data, and it’s designed to generate the income you need, then don’t second-guess yourself and deviate from your philosophy when it’s tough to sit through a correction.

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