Don’t Confuse Effort with Results
It may be possible to do more damage to your financial future as a tinkering and impatient investor than by staying the course. The temptation to make tweaks to investments and move money around, especially when markets are particularly volatile, may be hard to resist. In our experience, periods of volatility are exactly when being a hands-on investor with a lot of technological access to your accounts may be particularly dangerous. Why? Because humans routinely make the wrong moves under duress. When the market drops, it is incredibly hard to tell when it is going to go back up. However, if you stay invested and keep your money in play, you are part of the recovery as soon as it occurs rather than missing a significant portion of the growth.
According to Peter Lynch “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” This is evidenced in his review of annualized returns & performance of a $10,000 investment in the S&P 500 from 12/31/93 – 12/31/2013 when some of the best days were missed. Fully invested, the investment grew over that time frame by 9.22%. That same investment having missed just 10 of the best market days only grew by 5.49%. Missing 30 of the best market days grew by only 0.91%. *
Doubt is natural. Even investors working with financial advisors that have created sound financial plans can wake up in a panic and second-guess their ideas. So what should the average investor do? Stay out of your own way and try to avoid a few common investor behaviors such as:
- Failing to Diversify. A diversified portfolio may help you ride out the ups and downs that are inevitable in all market types, decades and asset classes. Diversification may help protect you from the risk of losing your whole investment or failing to capitalize on your investment at all.
- Getting Emotional. In our experience, succumbing to your emotions whether by fear or greed, is the fastest way to hurt your financial success in the market. As humans we are highly susceptible to groupthink and can quickly feed off the emotions of others. In doing so, emotional investors tend to buy high and sell low, the exact opposite of what successful investors strive to do.
- Tinkering. Rebalancing your portfolio regularly is one thing; daily visiting your account to tinker with or buy & sell is another. Start thinking about the long-term, instead of trying to tinker and make judgement calls about what the market will do next – market timing isn’t reliable.
What are a few good investor behaviors?
- Keeping diversified portfolios
- Understanding personal risk tolerance and holding investments accordingly
- Avoiding groupthink/herd mentality
- Ignoring emotional media reports & “hot picks” from the person next door
- Selecting a long-term investing strategy rather than attempting to time-the-market
- Asking for help from a trusted fiduciary
Taking notice of these good practices and actively working to avoid the bad ones may prove beneficial to your financial peace of mind.
*http://www.businessinsider.com/cost-of-missing-10-best-days-in-sp-500-2014-3