There are a lot of things you can do right in investing, and there are a lot of things you can do wrong. In the 22 years I’ve been an advisor, I’ve learned that much of the work of providing wealth advice is understanding the psychology of my clients. A lot of what I do involves helping clients manage their individual fears, needs, and preferences within the broader framework of prudent investment management.
In all those years, there are a few behaviors I see over and over again that can really sabotage a diversified, long term investment plan. Everyone is different, so you may see yourself in one or two of these but not the others — but by catching these behaviors, you can save yourself a lot of headaches, and potentially a lot of money!
Timing the Market
Almost everyone is tempted to time the market at some point with accounts allocated to long term, diversified investments. For example, I had a small handful of clients who pulled out when the market declined in 2008, and by the time they got back in, the market had already rebounded past their selling point. I have other clients who rightfully got shaky in late 2012 as the fiscal cliff approached, and decided to pull their long term money out of the market. They too missed the growth we’ve enjoyed this year.
I’m not saying it’s not prudent to exit the market if it’s beyond your risk levels or if you can’t afford to let your account fall below a certain point. It’s also quite a different story if you have specifically allocated assets to short-term trading. But in general, I have found that the odds are greatly against you when you try to time the market with your long term investments. Because long term assets carry weighty descriptions like “retirement” or “college fund”, it can be really hard to get past short term fears and dive back into the market.
How do you get past this kind of thinking? Consider all the things that you’re scared about when it comes to the market. Terrorism shaking the United States? Interest rates climbing to a crazy 23%? The worst stock market crash since 1929? Unemployment increasing to a scary rate? Well, I want to inform you that each of these has already happened at least once in the past few decades, and so did some spectacular growth and innovation. There are always going to be reasons and excuses for you not to buy into the market. Just remember that if you didn’t stick with it in the past 30 years, you also missed out on some of biggest bull markets in history.
It comes down to this: Times of turmoil are also times of opportunity. However, if you’re trying to take advantage of all the benefits of investing for the long run, you need to focus on the appropriate time horizon, which is usually measured in years and decades, and not in days and months. Obviously we can never predict the future, however the past has lessons to offer that we can look to as we prepare our portfolios for the long run.
Overplaying the Market
Similar to timing the market, those who overplay the market tend to be overconfident in their investment abilities. These are the investors who want to take the biggest risks and like to allocate all their investable assets to the hottest asset classes. They tend to overtrade, and miss out on longer term, steadier growth.
I usually suggest that these investors allocate a separate investment account to their trading hobby. This way, the bulk of their assets are kept in a well-diversified, actively managed portfolio that takes into account the appropriate time horizon, while the separate account is reserved for satisfying the client’s desire to actively trade and pursue risky investments.
Ignoring the Market
There are also those who just prefer not to know. When times are tough, these clients don’t want to hear about their performance, and when times are good, they tend to think they’ll always last. A good advisor will pick up on this preference and recommend an appropriate strategy that helps ensure long term performance. However, without an advisor or outside encouragement, these investors can find that their accounts stagnate with poor diversification and worse performance.
If you feel like it’s just really difficult to face your investments or your financial situation, you might be in this category. Taking the first step towards addressing these issues can be a huge effort, but I promise you, it’s worth it! You might greatly benefit from the guidance of a good advisor, who can help you allocate your account to meet your long term goals and who will take the reins in overseeing things like rebalancing or adjusting your investment strategy.
Last but certainly not least, and by far the most common bad investment behavior there is: Procrastination. You’ve heard it from me before, but I have to say it again, there is nothing worse you can do than waiting to take charge of your financial situation. I’ve had clients who took years to make a change, and in those years they suffered with stagnating portfolios and poorly diversified investments.
So, how do you get past it? Take 15 minutes to do one thing that can move your financial plan forward. Dust off that allocation, call your advisor, or find the 401(k) rollover paperwork you’ve been meaning to fill out. Whatever you can do, just take a small step today, and by adding up those steps over time you’ll find that you’ve made a whole lot of progress.
What financial behaviors are sabotaging your portfolio? Did these tips help? Email or call me and let me know – I love your feedback!
photo credit: Learning Futures Festival 2010 via photopin cc
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Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors
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