Successful investing is about losing money with aplomb

Two friends are preparing for retirement and they are thinking of investing. I'm worried. They have never paid attention to the market. They are newbies and the market devours newbies. Folk who enter the market in their 60s have stayed out of the market for a reason. They are smart enough to see gamblers as marks and, admit or not, in their gut they see the market as a place for gamblers.

When the market goes down, they bail. It is hard to tough out a bear market. It is tough to see 20% or more of your money disappear and this is what happens during a bear market. The market is up about twice as often as it is down. Bull markets follow bear markets. Period. Investors know this. Investors buy when stocks are on sale. Newbies bail, lick their financial wounds, take their remaining money and head for the door.

The market is a place to invest and investments go up and down. Buy good companies that pay good dividends and which don't tend to cut the dividend during down times and one will be fine. Just don't put any money into the market you may need at some point in the next few years.

And all companies can suffer unforeseen serious financial problems. Limit the amount invested in any one company. If the company folds, so be it. C'est la vie.

The answer is to diversify. Invest in fifteen or twenty great companies. Morningstar posts an excellent portfolio for Canadian investors looking for dividend income. Some banks post the Morningstar suggestions or make them available to those with self-directed portfolios.

The saying if you can't stand the heat stay out of the kitchen applies when it comes to the market. If you can't stand the heat, read huge losses, then stay out of the market.

• Invest in good, solid, dividend-paying companies
• Buy and hold
• Do not try trading. Trading is not for the inexperienced.
• Do not try timing the market. Most of us do and most of the time it does not work.
  
• Diversify: buy stock in a dozen or more companies in different sectors of the market.
• Set limits: Most agree one should not invest more than five percent to 10% of a portfolio in any one company.
• Do not invest money you may need in the next few year. Bear markets can last years.
• Keep a minimum of five percent in cash for emergencies. I have about ten percent at the moment.
• And be prepared to buy and hold in good times, easy, and in bad times, hard.

 

On a positive note. The market is up approximately twice as often as it is down. The up times tend to last longer than the down times. The market tends to go higher in bursts. 

Still, the down times are killers. I cannot emphasize this enough. Understand your risk tolerance. (My risk tolerance is rather poor. My wife is the gutsy one. She steers us through the bad times with aplomb.)

And I must give much deserved attribution for the two images to QuoteInspector.com.