Trying to outsmart markets? You're your worst enemy

With TV, the Internet and smartphones, news of the financial markets and economy is available more now than ever before. This never ending flow of information has investors torn between greed and fear. On the one hand, they want to participate in the market's growth and generate healthy returns. But at the same time, recent headlines have produced fear, tempting investor to lock in gains before another market collapse.

Trying to outsmart the markets has turned individual investors into their own worst enemy. Too many times I see a lack of diversification, compulsive trading, buying high, selling low, and acting on hunches or responding to the media or market noise destroying their returns. How do investors take their emotions out of the investment process? Well to start they need to distance themselves from the daily noise of the markets and stop doing things against their long term interests. Here is some straightforward good advice to help any investor become more successful in the future.

Follow a plan: Planning creates a purpose for investing. Many people spend more time planning their yearly vacations than they do on their investments. A financial plan acts as your detailed road map. It gives you direction; it outlines your goals, your risk tolerance, and your appropriate asset allocation. It keeps you on track in good markets and bad. A detailed plan helps ensure a smooth journey and increases the odds of successfully reaching your destination. Driving cross country without a road map would be foolish. Investing without a plan is no different.

Separate savings from Investments: Savings are usually meant for shorter term goals or for funds that you can have immediate access to. This liquidity usually comes with a lower return but also a lower level of risk. Investing is for longer term goals. You should have at least a 5 year time horizon before you might need the money. Warren Buffett once said "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

Asset allocation: I know many investors have heard the old saying "don't put all of your eggs in one basket" and that is true. But it's the percentage of stocks, bonds, cash, foreign stocks, real estate, etc. that determines how much risk you are taking and the return you might expect. The amount in each asset class should depend upon your own personal goals, needs, and risk tolerance. Asset allocation accounts for 91 percent of a portfolios long term return. Well balanced portfolios can produce higher returns while taking less risk than the overall market.

Stay invested: Market volatility is nothing new, it is the norm. Actually, the stock market rarely delivers yearly returns that are even close to its long term averages and that is also true for bonds as well. Investors need to understand the risk (standard deviation) associated with their investments to make sure they don't panic sell in inopportune times.

Investors who have stayed invested over the long run have significantly outperformed those who have tried to time the markets. It's time in the market, not timing the market. A leading research group, Dalbar, tracked individual investor's inflows and outflows to the stock market over a 20 year period. Their research found that individual investors had returned just 2.5 percent annualized vs. the S&P 500 at 8.6 percent (1995-2014).

Monitor and rebalance: Market movements will shift your allocation over time. When an asset class does well, you'll be overweight or when another asset class underperforms, you'll be underweight. Rebalancing keeps you disciplined to buy low and sell high. Also, as allocations change so do the investments within that allocation. Evaluate your investments to make sure they are still doing what you bought them to do. Whether it's a stock, bond, or mutual fund, you should always evaluate your investments and make the necessary changes when appropriate.

Market noise and psychologic temptations are not going away for investors any time soon. To be a successful investor you need to realize there are somethings you can't control, like the daily ups and downs or the market.

And somethings you can control, like how your assets are allocated and the risk level you are taking. Remember, investors who have followed disciplined long term strategies have been generously rewarded.

• John P. Daly is president of Daly Investment Management LLC, a registered investment adviser. www.dalyinvestment.com. He is opening an office in Mount Prospect in early February at 930 E. Northwest Hwy.