What's the biggest obstacle to the growth of your investments? If you're like many investors, you might point to factors like rising interest rates, recessions or conflict overseas.
But the truth is that the greatest impediment to investors' success is often their behavior. Good decisions translate into good investment results over time, while bad behavior can submarine your portfolio.
Successful investing isn't complicated. You determine your investment goals, create a well-diversified portfolio designed to achieve those goals, and do some minor tending over the years to keep your investments in balance.
Unfortunately, too many investors make investing harder than it should be. They buy and sell impulsively in an effort to outsmart the market—behavior that often results in buying high and selling low. It's no wonder so many investors end up trailing the stock market.
Over the past 20 years, the S&P 500 stock index returned an average of 9.22% per year, according to research firm Dalbar. But the average investor's return was just 5.02%. Poor decision-making is a major factor in the disparity, according to Dalbar.
Bad decision-making can be triggered by any number of factors. Just turning on the news or scanning the Web can be harmful to your wealth. One minute we're hearing hype about a new watch from Apple. The next we're being told that bonds will be crushed. And the next, we're reading that the market is surging—and we're missing out.
This unfiltered information prompts countless short-term, emotionally driven decisions—in other words, bad decisions. Even non-financial news, about geopolitical turmoil, for example can lead to knee-jerk investing.
Ultimately, though, self-defeating investing behavior is based within each of us, in our highly developed nervous systems. Humans have evolved to include a collection of biases and emotional responses that can make investing perilous.
Take recency bias, for example: It can make us forget that all bear markets eventually give way to bull markets. Recency bias helps to explain why so many investors, stung by the 2008 market crash, remain on the sidelines almost six years into the market recovery.
Overconfidence is another investing hazard. Overconfident investors tend to buy and sell stocks too frequently, believing that they're smarter than the market. And you know how that usually turns out.
There's no point trying to change the emotional wiring that humans have developed over eons. But we can control them, with a little help. First, we can create a financial plan. A good financial planner will take stock of your individual financial situation, as well as your goals, tolerance level for risk and time horizon.
That plan can provide the basis for an investment portfolio that is designed to meet your return goals while staying within your risk comfort zone. Knowing that you have specific goals and a plan to meet them can help you remain calm as temptations arise, and to stay focused on the long term.
An experienced financial advisor can also help you stay on track, by "holding your hand" through market volatility, making thoughtful portfolio adjustments when warranted, and reminding you that successful investing requires patience and discipline.
Please don't hesitate to contact us if you'd like to discuss investing further.
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