Be patient. The number-one obstacle that prevents investors from seeing
the huge effects of compounding mentioned earlier is lack of patience. Indeed,
it is difficult to watch a small balance grow slowly and, in some instances,
lose money in the short term.
- Try to remind yourself that you are playing a long game. The lack of immediate, large profits should not be taken as a sign of failure. For example, if you a purchase a stock, you can expect to see it fluctuate between profit and loss. Often, a stock will fall before it rises. Remember that you are buying a piece of a concrete business, and in the same way you would not be discouraged if the value of a gas station you owned declined over the course of a week or a month, you should not be discouraged if the value of your stock fluctuates. Focus on the companies earnings over time to gauge its success or failure, and the stock will follow.
Keep up the pace. Concentrate on the pace of your contributions. Stick to the
amount and frequency you decided upon earlier, and let your investment build up
slowly.
- You should relish low prices! Dollar-cost-averaging into the market is a tried and true strategy for generating wealth over the long run. Furthermore, the less expensive the stock prices are today, the more upside you can expect tomorrow.
Stay informed and look ahead. In this day and age, with technology that can provide you
with the information you seek in an instant, it is tough to look several years
to the future while monitoring your investment balances. Those that do,
however, will slowly build their snowball until it builds up speed and helps
them achieve their financial goals.
Stay the course. The second biggest obstacle to achieving compounding is the
temptation to change your strategy by chasing fast returns from investments
with recent big gains or selling investments with recent losses. That's
actually the opposite of what most really successful investors do.
- In other words, don’t chase returns. Investments that are experiencing very high returns can just as quickly turn around and go down. "Chasing returns" can often be a disaster. Stick to your original strategy, assuming it was well thought out to begin with.
- Stay put and don’t repeatedly enter and exit the market. History shows that being out of the market on the four or five biggest up-days in each calendar year can be the difference between making and losing money. You won't recognize those days until they've already passed.
- Avoid timing the market. For example, you may be tempted to sell when you feel the market may decline, or avoid investing because you feel the economy is in a recession. Research has proven the most effective approach is to simply invest at a steady pace and use the dollar cost averaging strategy discussed above.
- Studies have found that people who simply dollar cost average and stay invested do far better then people who try to time the market, invest a lump sum every year on new years, or who avoid stocks.
