One of the biggest mistakes of many investors is making retirement investing decisions based on their emotions. Doing so can lead to buying high and selling low — which is the exact opposite of a successful retirement investing strategy.
It’s not hard to see why investors may be susceptible to making emotional investing decisions. Today, we’re bombarded by investing and market news on a 24/7 basis — whether it’s websites that broadcast up-to-the-minute stock quotes or talking heads on cable TV shows who tell us how we should be investing our money.
Irrational Exuberance … or Unfounded Fear?
Of course, these so-called experts on TV give advice without taking into consideration any particular person’s individual financial situation or investing goals. In fact, the media has a vested interest in sowing either irrational exuberance or unfounded fear among investors —because these are the things that drive up ratings.
A good example of this occurred during the recent run-up to the presidential election. Many pundits were saying that if Donald Trump were elected president, the markets would crash. Some recommended that investors pull their retirement savings out of the market and park them in cash until things settled down after the election.
When it became apparent on election night that Trump would win, the stock market futures did take a tumble. The day after the election they quickly reversed course and have since hit record highs. Many investors who fearfully pulled their retirement savings out of the market before the election have missed out on this nice market bounce.
Predicting the Future
The fact is that nobody can consistently predict what the financial markets are going to do in the future — not even investing pros. Unfortunately, many investors believe they are the exception to the rule. They try to “time the markets” based on the plethora of information that’s out there but usually end up making emotional decisions that harm their portfolio returns.
Here are 4 tips to help you avoid falling into the trap of emotional investing:
- Create a long-term investing plan based on your goals and needs. This starts with determining your retirement horizon and gauging your level of risk tolerance. For example, if you’re young and have 30 or more years until retirement, you can probably afford to assume more risk with your investments. But, if you’re older and plan to retire in five years or sooner, you should probably invest more conservatively.
- Tune out the financial and investment media. This is especially true when the markets are particularly volatile. If following media coverage of the markets makes you more prone to making emotional investing decisions, then tune the media out. Remember that the self-proclaimed experts on that cable TV squawk box don’t know anything about your personal retirement goals and objectives. Their recommendations are not necessarily being made with your best interests in mind.
- Don’t try to hit investing “home runs.” Successful retirement investing depends on hitting a whole bunch of singles rather than a few home runs. Instead of trying to find one or two investments that you think are going to reap huge returns — but could also pose huge risk — diversify your retirement portfolio with a broad selection of securities designed to achieve a consistent return, as opposed to extreme highs and lows. Remember: You don’t need to capture all the upside in a strong market if you don’t capture all of the downside in a down market.
- Devise a proper asset allocation strategy and rebalance your portfolio periodically. One common mistake is investing heavily in the stock of a participant’s own company, or in stocks of companies in industries that investors know well. Instead, work with a financial or investment advisor to devise an asset allocation strategy based on your retirement goals and objectives. As changing market conditions shift the balance of securities over time, rebalance your portfolio on a periodic basis (such as annually) by buying asset classes that are underweight and selling asset classes that are overweight to your target asset allocation.
How ACG Can Help
At ACG, we have experience in helping investors when it comes to avoiding emotional investing. Please contact us to learn more about how we can help you in this crucial area.