5 Truths About The Markets
No matter what kind of economic conditions are prevailing at the moment, there are a few truths about how the markets (and investors) behave. For all of the advances made in algorithmic trading, all the new emerging sectors that dazzle investors, and all the trends that come and go on Wall Street, there are many things about investing in the stock market that have always been (and likely will continue to be) immune to change.
Technology has altered the way in which investors manage their portfolios—and much for the better. Managing funds, trading, and keeping a close eye on performance is easier than it’s ever been. On the flip side, these advancements also make it even more tempting for investors to act in haste, fear, or greed. Any of these three motivators can cause just as much trouble in a modern portfolio as they would 100 years ago.
Knowing which pitfalls to avoid begins with understanding what remains true with investing to this day. Here are some of the most common realities of the market that haven’t changed since the first stock exchange opened in Amsterdam back in 1653.
1. Timing the Market is Impossible
Timing the market has long been a staple of foolhardy investing, and for good reason. The idea that one can perfectly position their trades to correspond with the ebbs and flows of stock prices and overall market trends lends itself to maximum reward. But as with most things in life, perfect timing is often a byproduct of luck and circumstance rather than careful forethought (or a crystal ball).
This unchanging market reality is more than a time-tested maxim. In fact, Nobel Memorial Prize-winning economist Paul Samuelson even provided statistical evidence to back up the faulty logic behind trying to time the market. Worse yet, Samuelson found that timing the market often had the opposite effect that the investor sought: more people ended up missing out on gains by trying to time their moves, and lost money when attempting to buy at just the right time.
2. The Market Favors Patience
Patience is a virtue in all things—and it’s particularly handy when it’s a core tenet of your investing strategy. Fluctuations come and go, which in and of itself is another element of the market that has proven impervious to change. Market turbulence is rarely a reason to make a panicked move with your assets. Doing so typically means locking in losses on your investments and losing out on the potential to see things through to the other side when the markets hit their stride again.
Keeping your positions during a down market may sound counterintuitive, but there's a method to the perceived madness. Investors who are in the market for the long-term can, on average, end up making a better return on their investment over time if they ride out the rough periods. Even despite the 2007 recession and current economic turbulence, investing against the Dow Jones Industrial Average still nets a significant return on an investment made back in 2000. Even if you invested right before the 2007 crash, you can still make your money back within a few years’ time.
3. Never Chase the “Next Big Thing”
Hot stocks make headlines, which prompts less-than-savvy investors to throw money shares that may already be near the peak of their value. By the time the purported “next big thing” begins to get media coverage, odds are you’ve missed your chance to make a significant return on your investment by hopping on the bandwagon. Still, that hasn’t stopped many investors from diverting from their investing plans to try their luck at one big score. More often than not, these investments don’t quite pan out the way people hope.
This isn’t to say that investing in a hot stock is a patently bad idea. There’s often a good reason for incorporating a few prestige holdings in your portfolio. Apple shares, for example, were no bargain in 2018 when they were hovering in the mid to high $50 per share range. Now, Apple shares go for more than $100. Whether or not there’s room for these or other high-priced shares to continue to grow is up for debate, so use caution.
4. Volatility is Inevitable
Steady growth is certainly the ideal for most portfolios, but there are going to be times in which the market is neither bullish nor bearish—at least not for more than a few weeks or months. The truth is that there will be mixed periods often, and there are only so many signals one can pick up on before volatility picks up.
If you’re taking a long-term approach to your portfolio, volatility is merely a fact of life. You’ll experience several ups and downs, as well as periods that pepper in a bit of both. That being said, there are ways in which you can hedge against volatility, since it doesn’t impact all investments or sectors equally. In fact, there are some investment classes that run counter to market trends. Incorporating these holdings into your asset allocation mix can help you weather inevitable volatility.
5. Every Investment Comes with Risk
Volatility isn’t the only nerve-wracking phenomenon with regard to investing. Risk is another unavoidable factor whenever you place your money in an investment. There’s always a chance that a stock can lose value, a hedge fund can lose money, or that even a private investment in a business can go south. There are few safe bets in terms of investments; typically, less risk means less of an opportunity to make an outsized return on your investment as well.
But as they say, no risk—no reward. The challenge with investing is to pick out the right opportunity to make a return on your money that’s commensurate with your appetite for risk. Mutual funds offer far less risk than options trading, but the average mutual fund return is a fraction of what one could make by shorting the right stock. Ideally you would pursue an asset mix that incorporates slow-and-steady holdings with a few riskier, higher-reward plays. Doing so can give you exposure to big returns without leaving yourself too exposed to decimating your portfolio value.
Diversification is a Must
A diversified portfolio helps protect your assets from each of these unchanging aspects of investing in the markets. You won’t have to worry about timing the market if your money is spread across high-opportunity investments in several sectors. Remaining patient is easier when your portfolio touches upon different industries that may see a boost in value at different times. You may not need to chase the next big thing if your stable of assets generate a sizable, stable return. Last but not least, solid diversification can offset volatility as well as enable you to take on a calculated amount of risk.
Diversification goes beyond building a portfolio of different stocks and bonds. To truly diversify, you need to pursue other kinds of investments altogether. Alternative investments can fill this role while also providing you with returns and market exposure that securities can’t offer.
Diversify With Farmland Investing
Farmland investing offers this in spades. With farmland investments, you can create a portfolio that includes non-market assets that are historically stable in terms of retaining its value. You can also give yourself exposure to commodities markers as you’ll receive a return from the sale of the crops from the farmland you’ve invested in, which can be a must-have asset in a recession. Plus, when you invest in farmland through FarmTogether, you’ll open yourself to a world of opportunities hand-selected by a team of financial experts.
With FarmTogether, you can select the opportunities that are right for you based on factors such as the initial investment amount, projected returns from operations, and the projected rate of return. Better still, your farmland investment sits outside of the market—meaning you’ll already avoid some of the common pitfalls that one might encounter on Wall Street.
Learn more about farmland investing through our FAQ, or dive in and create an account to get started.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.