If you’re reading this article you’re no doubt aware there are thousands of ways to invest in the stock market. What’s more, most of these strategies tell you to follow short-term methods because these methods will make you more money. But is this true?

To do well in the stock market you need the right investment strategy

Unfortunately no.

Short-term strategies are well documented to significantly underperform solid long-term strategies, take far more of your time and increase trading and tax costs.

So why are they so popular?

The main reason is because human beings are wired to crave action. Purchasing great stocks, diversifying and allocating correctly and then waiting, sometimes for years, are counter-intuitive to most people. We like to feel we’re doing something, even if that, “something,” is detrimental to our portfolios.

Of course the investment vultures know this and create products and software designed to take advantage of our action-seeking nature.

So here are the facts.

History clearly shows that stocks can disappoint (and sometimes severely disappoint) in the short term. When you read about long-term annual returns averaging 8 or 9 percent, that doesn’t mean that every year the market returns those numbers.

Sometimes stocks fluctuate wildly over shorter timeframes – days, weeks, months or even a year or two. Owning stocks can be a gut-wrenching experience, especially in periods of high volatility when it can seem you’re on a roller coaster ride designed by someone whose sole goal is to make the most people sick in the shortest amount of time.

And you don’t have to go back all the way to the great depression to see this. As recently as 2007 to 2009, the stock market exhibited nauseating volatility due to the global economic crisis. Prior to that was the Internet bubble bursting in the early 2000s. If you knew how to invest correctly, bargains abounded during these two turbulent times. Unfortunately most people didn’t know how to invest properly and ended up losing large sums of money.

If you’ve never experienced a severe downturn, it might be difficult for you really understand how you would react when real money, your money, is on the line. But you need to understand this before you start investing because if you panic and sell out during the low periods, you’re not likely to do well as an investor.

As an example, suppose you’d invested $100,000 at the market’s top in 1973. By the end of 1974 your portfolio would have been worth about $50,000 (or half your initial investment). In today’s dollars, that’s like losing about $222,000 in a little over a year. To add insult to injury, you would have had to wait for about 10 years before your portfolio returned to just two-thirds ($66,000) your original investment.

But if you stuck it out until 1985, your portfolio would have fully recovered and then it would have made huge gains during the long bull market that followed.

But would you have had the patience to wait? Would you have been tempted to sell and run away screaming from the stock market? Or would you have jumped in and purchased more great stocks at the super-cheap prices at which they were being offered?

These are some of the questions you need to honestly answer before you invest your money.

If you had an exceptional investment system (such as the Value investing system Warren Buffett uses), you would have known exactly what to do, but if you were investing by the seat of your pants, following short-term trading strategies or listening to TV shows for your investing advice, then you would most likely have run out of patience, panicked and lost tons of money in the process.

It’s a fact that if you invest in the stock market you will inevitably experience a big price drop in the stocks you own. That’s why you need to be psychologically prepared and have a good system on which you can rely to see you through the dark times.

Letting your emotions rule your decisions is a recipe for disaster.

However relying on a proven long-term investment strategy, that’s been shown to work in all market conditions, ensures you will always know what to do and increases the probability you’ll ride out the bad times and be properly positioned for the good times that will surely follow.

 

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