By John Demartini
Stability and patience are the keys to wealth building, says Dr John Demartini.
Human emotions, above everything else, interfere with wealth building. When investors first get into the stock market, if their shares go up they get excited, greedy, and want to buy more.
If their shares go down, they get depressed, fearful, and want to sell. That's not a wise long-term strategy; it's a short-term emotional approach, and it's completely opposite to financial wisdom.
There's a principle in investing called dollar-cost averaging, and it works like this. Say you buy 100 shares at $1 each, the market takes a dive, and they drop to 50¢. Is that bad?
Not if you've done your homework and bought shares in a sound, valuable company. If you spend another $100 at the new price, you'll get 200 shares for the same amount.
You then take the average by adding up the total cost and dividing it by the number of shares ($200 divided by 300 shares), and you've brought the price per share down to an average of 67¢. You get more shares of stock per dollar, and when the market inevitably recovers, you make more money.
If the price of the stock rises, is that good? Yes and no, because now if you buy more, you're paying a higher price per share.
So, contrary to the emotional reaction, you're usually better off holding or buying when shares fall (as long as you have reason to believe they'll eventually rise again), and holding, or in some cases even selling, when they rise.
A couple of years ago, one of my clients' stocks just plummeted. The client was frightened, so I said, "Don't react. Don't sell it."
He said, "I have to sell or I'll lose too much. This isn't theory, you know, its real money."
"No, no, no, no, no!" I said. "You're reacting to short-term fear and gratification. Leave it there." "Okaaay... I guess," he said. "But my intuition says..."
Again, I replied, "No, that's your emotional fear talking. Don't confuse fear with intuition."
Fear is an instinct that comes from the gut, but intuition comes from the mind and heart. If you listen to your mind and heart, your gut-wrenching fears won't fool you.
Eventually my client calmed down and didn't sell, and the stock went back up within three months. He called me a few days after it rose and said, "I'm so glad I didn't sell because I would have had a big setback. Thank you for being there to remind me." It helps to have a friend or mentor there when you almost stray from your long-term strategy.
Reacting to daily fluctuations in the market is less wise than following longer-term strategies. The basis of the pyramid structure is that you're a long-term investor. You're in for the long haul, and you simply ride out the temporary emotional oscillations of the mass of investors. You're not a day trader focusing all your energies on the market and trying to make your percentages on lots of little movements. Whether the market goes up or down doesn't mean as much long term.
You fall a little here and rise a little there, and the dollar-cost averaging works out to a long, steady rise. History has shown that no matter how far it falls, over time the overall market eventually comes back to a higher level than its previous best. Day to day and month to month, it's volatile, but over years and decades, it still grows.
Opinions are the cheapest commodities on Earth, and those that circulate the most have the least value. The masters of investment – the individuals, families, and organizations that have stood the test of time and built fortunes over decades, generations, and centuries – know these principles.
The majority of investors don't, and their actions are based not on financial wisdom but on fleeting opinions that change with the weather. There's even an investment philosophy called contrarianism that says to be financially successful all you have to do is the opposite of what the masses are doing. You can hit about 75 percent accuracy that way!
A Wall Street financier once said to me, "If you ever see an investment advertised in every conceivable form, you'd better pull out."
It's common to see investment ads in magazines such as Worth and Forbes, but if they start showing up in newspapers and glamour magazines, it's time to think twice.
Just because the stock or real estate market goes up and people are making money doesn't mean it's time for the fall and big run, the herd phenomenon. When people are leaving their careers in droves to play in the market, making risky margin loan investments and throwing their total savings into too few investments, that's when the market is primed to crash.
Early in 1929, a shoe-shine boy gave multimillionaire Bernard Baruch a hot stock tip. Mr. Baruch went to his office, called his broker, and said, "Sell me out. When shoe-shine boys are giving tips, it's time to get out of the market."
That October the biggest crash in financial history struck, but since then the market has risen over and over again to many times its previous record highs. If $100 had been invested into a managed fund in 1928 and left alone, by 2002 it would have grown to $175,178. In contrast, if the same $100 were switched between investments and asset classes as soon as they started to show negative returns, it would have grown to just $86,902 over the 74 years.
Stability and patience are the keys. As a budding financial genius and master, your job is not to listen to the mass consciousness that fears and flees, but to adhere to the tested principles.
Don't spring up like a short-lived, flimsy weed. Grow like a great, sturdy oak tree.
For further information about Dr John Demartini go to www.drdemartini.com
