The 2 most important rules an expert learned from investing for 40 years

James B. Stewart on NBC's "TODAY" show, October 7, 2019.
Nathan Congleton | NBCUniversal

It wasn't during some of the best bull markets in history that James B. Stewart learned the most during his 40-plus years of investing but at more volatile times like these, when the major benchmarks remain in bear market territory and are swinging up or down on a daily basis.

"The biggest lessons I learned over that time period really did come in the periods of great stress in the market," says Stewart, a columnist and reporter for The New York Times. "When times are bad, I think you learn a lot."

It was during the three bear markets prior to the current one — the ones that started in 1987, 2000, and 2007 — that Stewart developed a plan with two simple rules for navigating those downturns. Even so, it's not always easy to stick with that plan, as he demonstrated in a March 27 column titled: "I Became a Disciplined Investor Over 40 Years. The Virus Broke Me in 40 Days."

"It's one thing to have a plan. That's step one, you need it," Stewart tells Grow. "But then step two is following the plan, and it's incredibly hard."

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Here are the lessons Stewart has learned.

Rule 1: Never sell in a panic

Stewart, now 68, began investing in the stock market when he was in his 20s and had an appreciation for investing passed down from his father. "He was an enthusiastic investor; he was a strong believer in American enterprise and the potential of business to grow and pay dividends and reward investors," Stewart recalls. "He was a big believer in the stock market, and he really passed that on to me."

Stewart approached investing with an appreciation of its merits and risks, and he heeded the advice of experts. He invested in index funds that track broad market benchmarks, with money that he didn't need for the foreseeable future, and he knew that stocks can experience short-term volatility which is why they yield a higher return when compared to other assets. 

Still, there were lessons that Stewart had to learn firsthand. And it was relatively early in his investing career that he first experienced a major market crash in 1987, when the S&P 500 tumbled more than 33% in just over three months and plummeted 20% in a single day.

"I held out initially because I was traveling and in fact I couldn't sell, but a few days later there was another downdraft," Stewart recalls. It was his first experience with a bear market, and as he watched while his investment gains evaporated, he made what he says now was a mistake. "I panicked. I sold all of my stock holdings, and you know as so often happens, I ended up selling near the low point."

Stewart soon realized that his nonplan was "a really bad strategy." Because he was caught off-guard by the market downturn, he let his emotions take over. He sold stocks near the low and then he waited for several months to invest in the market again. 

"So I did make a firm rule at that point: Never sell in a panic," Stewart says. "And to make sure that happened, I said I'm never going to sell stocks on a day when the market is down. And the flip side of that is, I'm never going to buy when it's up, either."

Rule 2: Buy when the market falls 10%

Through the remainder of the 1980s and all of the 1990s, Stewart says he was fully invested in the stock market. Along with other investors, he "rode the great bull market of the 1990s to sort of dizzying gains."

When the market began to decline in 2000, Stewart didn't panic. "I will say, I stuck to that rule, but I didn't have any other rule for dealing with it, so I just sat there and waited and waited and it went down, down, down," he says. From a high in March 2000, the S&P 500 tumbled 49% to a low in October 2002.

While Stewart didn't sell, he didn't buy stocks, either, even as prices became much cheaper. That's when he developed his second rule: Invest when the market is falling. That strategy ensures that Stewart can take advantage of a goal for most investors to buy when prices are low and sell when they're higher. 

"If you're going to buy low, you're going to have to find a time to step in there. You can't be so frightened of it going down even more that you never buy," Stewart says. "So I came up with a new rule: Every time the market would go down 10%, I would put some more money into the market."

Those rules helped him going forward. So, too, did two guiding principles that he recommends new investors follow that can help you avoid mistakes.

To avoid mistakes, follow your plan, not your feelings ...

Whatever investing plan you decide upon, the most challenging part, often, is finding the discipline to stick with it. Stewart implemented both of his rules during the 2007-2009 financial crisis, when the S&P 500 slumped nearly 57% — even when it was "really hard" to do so, he says.

"You cannot be caught by unexpected moves in the market, because if you don't have a plan, then your emotions are going to take over," Stewart says. "They are going to rule what you do."

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Even armed with a proven strategy, one that had helped him prosper from the last bear market, Stewart found it difficult to follow his plan when the market started dropping this year. As a result, he says he made two emotionally driven mistakes that other investors should try to avoid.

The first mistake was that he violated one of his own rules and bought stocks before the market had fallen at least 10%. Having waited for more than a decade for a bear market in U.S. stocks, Stewart says he was excited about the idea of investing more at lower stock prices.

"At first, I was overeager; I wasn't frightened enough," Stewart says. "My eagerness to try to earn more money was stronger than my fear of the virus."

But the market kept tumbling. It even experienced what Stewart calls "a dizzying drop" of nearly 12% for the S&P 500 in just one day. As the market continued to fall, Stewart made his second mistake: He was so shocked after checking his portfolio that he did nothing.

"I was paralyzed. I knew I should be buying; I didn't," he says. Finally, by mid-March, when the S&P 500 was down more than 30%, he finally reinstated his investing plan. 

"I said, 'OK, fine, this is ridiculous, you are an experienced investor, you have been through this before, get a grip here,'" Stewart recalls. Going back to his plan made him feel better: "At least now I'm doing something. I'm taking charge of my destiny."

... and keep a long-term perspective

Stewart says it was important to be "totally honest" about his mistakes navigating the market's latest bout of turbulence. "I give out financial advice. I tell people to get a plan, and follow it, and here in the midst of this virus thing, I was not following it."

Some people may have to make their own mistakes to come up with a market volatility strategy that works for them. Still, Stewart recommends crafting a plan at a time when things are calm. "You have to be ready to kind of ride through some of these turbulent periods when you own stock and just keep to the faith that over a long period of time, they're going to go up." 

Starting early makes that approach easier and more attractive. Your 20s are "the perfect time to invest in stocks for the long term," he says. That's because you'll have decades on your side to recover from downturns and turbulence and to benefit from the power of compounding.

"Time is on every investor's side," Stewart says. "And for young people, it's such a powerful way to save, because over the long period of time that you can be in the market, the compounded rates of return are really, really high."

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