Investors tend to do poorly when they react to what the market does instead of preparing for what may happen and taking advantage of long-term forecasts. With a reactionary attitude, investors will rarely do well.
Bad investments happen when investors buy investments high and then sell investments low. This seems like a simple, common sense and easy to follow rule, but each time extraordinary events happen in the stock market and the rule is broken, people will ultimately say, “This time it’s different.” John Templeton, a mutual fund pioneer and asset manager, had this to say, “The most dangerous words in investing are ‘This time is different.’”
As the chart shows, when stocks are historically at their cheapest, investors sell stocks and buy bonds. When stocks are at high prices historically, investors buy stocks and sell bonds.
Going forward into the unknown, investors will make money by having a wise investment strategy and sticking to it. Good investment strategies may still have time periods where performance lags in times of crisis. For example, during the rise of the tech bubble at the end of the 90s, a good investment strategy lagged the performance of tech stocks people were using to get rich. However, the good investment strategy didn’t crash like many of the tech stocks.