Find ways to stay focused on your retirement goals.
Thanks to 24-hour financial news channels, the Internet and the mobile devices we all seem to have these days, there is so much more news and information about the markets available to us. While you might expect that it would help us get better investment results, the opposite is true for many investors.
This is because our emotions can take over and negatively affect our investment decisions. With this guide, we’ll help you understand why this happens and what you can do to make better choices for your portfolio.
Why do these decisions happen?
Media interest in the financial markets rises in times of market stress
Business models are driven by attracting more viewers or subscribers, and for a financial media platform, nothing attracts individual investors more than bad news. All of that noise may push your emotional buttons, leading you to make hasty decisions and buy or sell your investments too quickly.
Individual investors often underperform market indexes
This is often a result of a vicious chain of events. News headlines drive their emotions, which can cause irrational investment decisions, which then may lead to poor performance.
And this is a significant performance reduction.
- Major stock and bond indexes returned between 5% and 8% on average over the last 20 years
- Individual investors earned just half of that over the same time period
Reacting and trying to time the market takes a toll
Individual investors reacting emotionally to news headlines tend to buy and sell investments frequently and at inopportune times.
Movement in and out of the market runs the risk of missing many of the best days — the more good days missed, the more potential gains given up.
What you can do to make better choices for your portfolio
To make the most of market opportunities, it’s best to tune out the daily news and stay invested for your long-term goals. Although there will be down days for the stock market and negative headlines that may go along with them, the likelihood of market losses drops dramatically over time.
You can see this with the S&P 500 Index going back to 1929. Negative returns become much less likely when you stay invested for 10-year or 20-year periods.
Balance your portfolio for potential value
You’ll be in a better position to reduce the amount of risk you take on and may potentially increase the returns you realize over time if you:
- Avoid the temptation to trade in or out of the market
- Stay invested in a balanced portfolio based on your long-term goals
Maintain your discipline and remember these principles:
- Tune out the noise from the financial news media and if you feel like you taking action in response to news events, seek out professional advice.
- Stay focused on your plan. Remember, you are investing for the long term.
- To help lessen the impact of market fluctuations, maintain a diversified portfolio that’s suitable for your retirement goals and risk tolerance.
- Take advantage of opportunities to invest when others react based on emotion; consider buying when they are selling in falling markets.
1 National Bureau of Economic Research (NBER), Sept. 2010.
2 Ned Davis Research, Dec. 2014.
3 Source for index data: Morningstar; Source for average investor data: Dalbar, Inc. QIAB study, 2015.
4 Source: FactSet (Feb. 2016). Past performance does not guarantee future results.
5 Source: FactSet (Feb. 2016).
6 Source: Morningstar and Fact Set. Past performance does not guarantee future results.