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Learning How To Surf The Investment Waves

Ways to choose the best investmentsThis is a post from Jason at Islands of Investing. Enjoy!

Learning to surf the waves that life throws at us is a hugely important skill to leading a happy, fulfilling life. Some people spend all their time and energy doing everything they can to try stop the waves and make the ocean flat (i.e. complain about the way things are!). It’s a complete waste of time, but far worse, you’re probably making yourself pretty miserable in the process. And for all this effort, you’ll have made zero progress towards whatever you’re trying to achieve!

A far better approach, in life as well as investing, is to learn to surf the waves. If you’ve ever been surfing and caught a wave, you’ll know that amazing feeling when you’re ‘at one’ with the wave, working in harmony, floating towards the shore together. It’s a sensational place to be, and we can get there in all parts of our life – including the investment world. But try and fight it, stop it, or take it in another direction, and you’ll be thrown clear off your board.

The investment world has its own kind of waves. And this is one beach we can’t run away from if we want to achieve some of the dreams and goals we’re aspiring to for ourselves and our families – especially if early retirement or financial independence is the goal.

So what do the investment waves look like?

There are a huge number of things that you have absolutely no control over in the investment world. The economy. Tax rates. Natural and unnatural disasters that shake the investment world. New technologies that make existing industries redundant. Financial advisors who don’t have your best interests at heart. Stock prices. The actions of management of businesses you own shares in. The list goes on.

The only way to succeed (as well as keep your sanity!) is to focus on what you can control, and learn how to be your best when it comes to surfing those waves that come your way.

And fortunately, there are a huge number of things you can control. How much of your income you save. Where you put your money. How much planning and research you do for your investments. How you react to media headlines. Who you seek your advice from. Whether you stick to what you know, or take unnecessary risks.

Most importantly, you can learn to control your own behaviours and habits. Fear, greed, impatience, overconfidence – these are the things that can usually get us in the most trouble.

So with that in mind, here are some great surfing techniques that can help you ride the investment waves with confidence:

Strengthen your core for greater surfing stability (aka save hard!)

If you’re up to your neck in debt, and spending everything you earn, it’ll only take a little ripple in the water to send you flying off your board. The more of your income you can save, the better you’ll be able to handle any unexpected waves that come your way.

Choose the right part of the beach to surf at (aka invest in what’s right for you)

The worst thing you can do is head straight out to the deep end, get pounded by your first huge wave, and never want to surf again. Stick with what you know, and as your skills develop, find some more challenging waves if this help you achieve your goals. Don’t start out by using ‘butterfly spreads’ to trade options if you don’t even know what a stock is. You might get lucky and catch a great wave first time, but try to avoid getting overconfident and thinking you’re invincible – it’s more dangerous than you might think!

Plan in advance how you’ll handle those ‘once-a-decade’ freak waves

The stock market in particular is prone to huge waves that can come out of nowhere. But don’t waste your time worrying about it while you’re out surfing on a beautiful, sunny day. Do all this planning before you step into the water. For example, this might involve investing in a range of stable, high dividend paying stocks, which will keep sending you dividends regardless of the waves that come. It could be investing only what you can afford to lose, or making sure you don’t need to draw any income for 5, 10, or 15 years, so the waves won’t bother you. Or perhaps you’ll choose to pay no attention to the waves at all. But decide how you’ll react to those freakish waves before you invest.

Learn the fundamentals

Before you jump on a surfboard, you typically spend some time on the sand learning and practicing the basics. Making sure you understand some basic financial concepts, and the right behaviours and attitudes for investing, will make your early surfing attempts much safer and more enjoyable. But don’t be too afraid to dip your toe in the shallow end if you’re just getting started – after all, you only really learn once you get into it! There are plenty of fantastic books and materials out there to help get you going.

Don’t pay too much attention to the weather forecasts (aka don’t obsess over what the media says)

There is a constant stream of commentary and predictions in the media about what ‘the market’ is going to do, particularly in the short term. But unlike weather forecasts, they all pretty much end up being completely wrong. They are also usually much more negative than positive – you’ll hear a lot of reasons why you shouldn’t get out in the water today, because some huge waves are coming. These sorts of headlines draw more readers after all. Don’t waste much time and energy with this – make a plan that works for you, get out there, ride the waves that come your way, and know in the long run you’ll be far better off.

Avoid the crowds

Don’t get caught up trying to surf where everyone else is surfing. Investing is definitely one area where following the crowd rarely pays off. Crowds can go mad following each other, which is how bubbles are usually created – giant waves which eventually crash with devastating results. Have the strength to stick with what you know – like Warren Buffett did during the tech boom and bust in 2001 (his famous saying “Be fearful when others are greedy and greedy when others are fearful” also sums this up nicely). It’s really not much fun surfing at a crowded beach anyway.

If you can master the art of surfing investment waves, you can easily extend this to other parts of your life (just like I’ve had to learn to roll with the waves of being a new dad for nearly 2 years!).

So figure out where you want to go in life, learn the skills, behaviours and attitudes needed to surf the waves in your world, grab your board, and enjoy the ride!

Jason is the creator of the Islands of Investing blog, and despite surfing the investment waves for over 15 years, still struggles to stand up on a real surfboard! Islands of Investing is a quiet place, away from the constant noise of the investment world, where we focus on learning the more important things for becoming a better investor.

 

*The inspiration from this post’s title is based on a quote from Jon Kabat-Zinn, an expert on mindfulness meditation and its application to health and medicine. (http://www.goodreads.com/quotes/331826-you-can-t-stop-the-waves-but-you-can-learn-to)

 Image:Wikipedia Commons/Evan Fa

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

23 comments

  1. Great advice regarding dealing with the actual situation rather than the situation you would rather be in. I find that many people will complain about how difficult something is and then do nothing, rather than accepting things for how they are and having a real go.

    The only thing I disagree with is not following the crowd. I have made quite a lot of money by following 1 simple rule – “The trend is your friend”. I have found that about 8 to 9 times out of 10 the trend is indeed your friend.

    • Thanks Glen! I hear you on your ‘follow the trend’ rule, and it sounds like you’ve taken the time to develop a strategy that you’re confident about and works for you.

      But for me the idea of not following the crowd is more about doing something ‘just because everyone else is’. Like feeling you should buy a stock because all your friends, neighbours, colleagues have all bought it and made money out of it, the media recommend buying it, and you feel you’re missing out – rather than adopting a very specific strategy as you have. Same goes for adopting an investment ‘strategy’ that everyone else seems to be using. I think the key is to have a firm foundation in a plan that uniquely works for you.

  2. I really liked the wave analogy! I think all of this advice is pretty sound. Taking baby steps and doing some research before jumping all the way in is usually for the best. Not paying attention to the news is important as well. You’ll have quite a choppy ride there.

    • Thanks E.M! Yeah the media generally isn’t much help when trying to invest well, especially when you’re just starting out. All that noise can make it very hard to focus on the basics and understand what works best for you. You’ll go crazy trying to pay attention to it all, and any decisions you make based on what the media says usually don’t work out for the best in the long run.

  3. Good advice and definitely a relevant analogy. I like your suggestion of not paying too much attention to the weather forecast. Anyone who said the housing crisis was in trouble in 2006 was laughed off the TV set (literally!).

    • Thanks DC! Yes, that’s a perfect example of where the media couldn’t have been more wrong, and unfortunately that’s more often than not the case. Forecasting is really not a great use of time and energy in most cases, and can get especially dangerous when you start making big assumptions on what will happen in the short term. It helps to be a bit more open minded to the different possibilities, but create a plan that allows you to ride it and survive no matter what.

  4. As a beginner investor in stocks, those were great advice. Thanks!

  5. Great analogy and even better advice Jason! It can be so easy to get caught up by the media or fear over what’s going on in the market, which is why teaching yourself some basics can go a long way towards helping fight against that. I think even with a little bit of knowledge you can do a lot of good things when it comes to investing, you just need to find what you’re comfortable with and get started.

    • Thanks John! I completely agree with you, especially when it comes to finding what you’re comfortable with. You don’t need to follow what anyone else is doing if you don’t quite understand it, and you can focus on growing your comfort zone over time as you build your knowledge and experience.

  6. I love your analogy of working on your core. Just like your core is essential for your balance and most areas of your physical life, having cash is critical to even begin investing so focusing on building it is key.

    • Thanks Shannon! Yeah just like with your physical life, it can be tempting to dive into all sorts of new exercises and activities, but without a solid core you’ll usually end up hurting yourself! Best to make sure you’re in decent shape before doing anything too dramatically outside your comfort zone!

  7. I have found that not even looking at my investments is the way to go. I turned off all alerts about gains or losses (except confirmation of deposits) and completely ignore them except for my monthly deposits and quarterly net worth updates. I have a tendency to panic if I look at anything investment-related more frequently…

    • I think generally the less you check your share price movements, the better, particularly if you’re investing for the long-term. You usually just end up reacting emotionally and making a decision that you probably shouldn’t, like selling out of a great investment. And watching the prices move up and down every day doesn’t do much good for your well-being, since the pain we feel from watching a share price drop usually far outweighs the pleasure from watching it go up – so in the long run you end up just feeling a whole lot worse!

      What I love though is that you recognised the issue it causes you when you check your investments too often, and you’ve developed a plan that helps deal with this. Awesome stuff!

  8. We pay attention to what’s going on in the markets, but not too much attention. Luckily this has gotten easier the longer we’ve been invested, as we’ve seen plenty of days when the markets drop and then seen them rebound, etc. We even survived the great recession and huge stock market drop (and came out the other side much better for having stayed our investment course!) I think there’s a fair chance we’ll continue on this course for years to come- hope so, anyway!

    • Hi Dee! What a great story to hear that you stayed the course at some very scary times when the world was panicking, and you’re much better off for it! Experience and perspective definitely helps. I hope you keep that great perspective and that your success continues!

  9. Some great advice here! I think it’s important to diversify across many investments that both include and don’t include the stock market. As far as stocks, I saw a huge drop in my index funds during the last crash (obviously), but I had several strong individual stocks that really weren’t affected at all. It was reassuring to have that diversity in my stocks too.

    • Thanks Kalen! That’s awesome you had some individual stocks that held up well during the last crash. It can be amazing how the largest stocks and index funds that a majority of the world hold are often most prone to the crashes when people panic, while sometimes specific companies, like smaller, less popular companies or those in certain industries can be relatively untouched. It’s one of the reasons I actually like investing in specific shares directly. It’s great that you’ve got a plan to diversify and handle any major shocks like that one. Thanks for your comment, all the best!

  10. It is a great analogy! Stock market went down the last fews days at the end of last week and I lost thousands of dollars. In the past I would have freaked. Now I don’t worry, and just ‘ride the waves’.

    • Thanks debt debs! Brilliant to hear you’ve developed this great attitude towards your investments! As long as your plan is still intact, and your prepared for whatever comes your way, then paying too much attention to short term ‘ripples’ and forecasts are a huge waste of positive energy. Thanks for sharing!

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