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Tony Robbins, renown life and business strategist who has coached more than 50 million people, has dedicated himself to spreading personal finance literacy across America. And his mantra is timely: Don't sit on the sidelines in fear or make rash decisions because of stock market volatility. As he points out: "The single biggest threat to your financial well-being is your own brain."
Translated, that means we all have biases and fears that we need to shake — from the aversion to losing money to investing overseas. As he notes in his book "Unshakeable: Your Financial Freedom Playbook," you need to have "a state of mind that will help you have unwavering confidence even amidst the storm."
That is especially true in today's volatile stock market environment. To be sure, 2018 was the most volatile year since 2015, measured by intraday moves of 1 percent or more. That year, the S&P 500 recorded 72 intraday such moves. This year has seen 64 through Friday. That compares with 48 in 2016 and just eight in 2017. The month of December was the worst final month of the year since the Great Depression, with a loss of nearly 10 percent.
According to Robbins, during big swings in the market, it's wise not to make emotional decisions. To be successful, the best bet is to follow Warren Buffett's golden rule and have a long-term horizon to capture a compounding effect that others who quit lose out on. This strategy means your asset allocation, cash flow and mindset are designed to deal with short-term risks.
"There will always be booms and busts. You cannot really time the market. It doesn't work 99 percent of the time," Robbins says. To prove his point, he notes that the average return in the S&P over the last 20 years was 8.6 percent. But if you were out of the market for just 10 of the best trading days during the period, your returns would have been only 2.5 percent.
Robbins' advice has been gleaned from his interviews and work with some of the greatest financial minds of our generation — from Jack Bogle, founder of Vanguard Group, and Ray Dalio, founder and co-CIO of Bridgewater Associates, to Warren Buffett, founder, CEO and chairman of Berkshire Hathaway.
As he explains, these money mistakes can derail individual investors' wealth strategies.
Smart investors must be flexible and willing to change their approach. As Robbins points out, "you cannot get bogged down by biases that get in the way of intelligent investment decisions." The key is to actively seek out qualified opinions that differ from your own. Many famous investors like billionaire Ray Dalio who founded one of the world's largest hedge funds, are obsessed with searching for divergent viewpoints to find out what their reasoning is and uncover facts he may not know. This is the time to consult with a trusted financial advisor with a long track record of success who can guide you.
No one understands this better than Warren Buffett. He consults regularly with his partner, Charlie Munger, vice chairman of Berkshire Hathaway, who is famously outspoken. In his 2014 annual report, Buffett recalled that Munger had convinced him to change his investment strategy: "Forget what you know about buying fair businesses at wonderful prices; instead buy wonderful businesses at fair prices."
It's easy to freak out about today's huge wild swings in the stock market, but now is not the time for overreaction. "There will always be booms and busts, as part of the market cycle," says Robbins. "Bull and bear markets are like the seasons—winter always comes but afterwards comes the spring."
Realizing this simple truth is important, says Robbins. As he explains, the biggest threat to your wealth is fear, an emotion that can trigger poor decisions. "If you panic during a market downturn and sell out you cannot recoup assets on the upside."
In the 22 corrections in the post-war era, the S&P 500 suffered an average loss of 13.8 percent and dragged on for 148 days, or roughly five months, according to CFRA. After hitting a low, it takes the market about four months, on average, to get back to even.
"Eighty percent of corrections (when the market falls 10 percent from its 52-week high) never turn into a bear market. Keep that in mind," says Robbins.
The sad truth is that most investors buy the wrong thing at the wrong time just because they think the current market trend will continue for the foreseeable future, the strategist notes. As Warren Buffet says: "Investors project out into the future what they have most recently been seeing. That is their unshakeable habit."
Instead, individual investors should do what the best investors in the world do: create a simple list of rules to guide them when things get too emotional, stay the course and remain on-target long term.
We constantly overestimate our abilities, our knowledge and our future prospects, Robbins writes in his book "Unshakeable." It is a psychological bias and can happen for various reasons, including when a financial professional convinces them there is a hot new investment that's going to crush everything out there and they let that person's passion become their unwarranted confidence.
There are certain people prone to overconfidence. Finance professors at the University of California, Brad Barber and Terrance Odean, examined the stock investments of more than 35,000 households over five years. They found that men are especially prone to overconfidence. They traded 45 percent more than women, reducing their returns by 2.65 percent a year. When you add the additional costs of high transaction fees and taxes, that is a big hit.
Many of the world's great investment minds, like Vanguard Group founder Jack Bogle, advise investing in a portfolio of low-cost index funds and then holding them through thick and thin. This gives you the market's return without the triple burden of management fees, high transaction costs and hefty tax bills.
"Index funds give you broad diversification, which is another powerful tool against overconfidence," Robbins notes.
Believe it or not, the world's greatest investors are all obsessed with not losing money, Robbins points out. That comes first for them. Most billionaires take small risks, even when a stock market is soaring upward.
A good example is Sir Richard Branson, the founder of Virgin Group, who oversees more than 400 companies. An inspired entrepreneur and adventurer in life, he believes you need to do everything you can to minimize investment risk while maximizing returns. He calls this his asymmetric risk/reward philosophy.
A good example is when he launched Virgin Atlantic Airways in 1984 with just five airplanes. He spent a year negotiating a deal with Boeing that would let him return those planes if the business didn't pan out.
Greed and impatience are dangerous traits when it comes to investing. We all have the tendency to want the biggest and best results as fast as possible, rather than focusing on small, incremental changes that compound over time.
Investment pros agree that you should avoid putting all your money in any one asset class, such as real estate, stocks or bonds. Also, don't put all your money in one favorite stock, such as Apple, an MLP or a piece of waterfront property that can be damaged by a storm. Instead, diversify across markets, countries and currencies around the world. We live in a global economy, so investing solely in the United States is not the best strategy.
This might sound like a big promise, says Robbins, but diversification does the job in the worst of seasons. For example, between 2000 and the end of 2009 — a period known as the lost decade because the S&P 500 produced an annualized return of only 1.4 percent a year — international stocks averaged 3.9 percent a year, while emerging-market stocks returned 16.2 percent a year.