One of the most important parts of anyone’s financial plan is the investment portfolio. How well that portfolio performs affects an investor’s needs and goals directly, not to mention the investor’s stress level. Many factors go into the performance of one’s investment portfolio with the constant changes in the markets being the most prominent and pervasive of those factors.
It is widely understood that how the markets perform over time is something that is beyond our control. The markets move up and down for obvious reasons as well as for no apparent reason, which concept can be very frustrating for us as investors. Some investors attempt to time the markets and to make moves based on what they think will happen with the markets. These investors may get lucky from time to time but this approach usually does not pay off for investors and is not a dependable way to improve your results.
The attention given to the markets and their changes – and our desire to make some use of that information – is exacerbated by the near instant availability of data on market moves and investments and complicated by the wide range of opinions on those moves. Some investors watch the markets during each trading session while others may not check what the markets are doing very often. You can guess who may be less stressed or confused. The huge and constant flow of market data and predictions can be overwhelming and distract us from what we can be doing to improve our investment results.
So what can we do to minimize distractions and do the right thing with our investment portfolio? The first step is to understand that we cannot control the markets, do not need to focus on what is happening from moment to moment, and do not need to read or accept every opinion or trend in the financial industry. Next, we should consider what aspects of investing we do control – our contributions to the portfolio as well as withdrawals, the advisers we choose to work with, the goals we set for ourselves and our families, and the mix of investments we choose for our portfolios.
For example, we can diversify our investments and avoid placing all or most of our investable assets in a single security or niche. Even if a particular investment seems very attractive and one is certain that it will grow, focusing on that investment is making a bet and so taking a risk that is unnecessary. If the investment does not pay off, then the portfolio balance and one’s ability to attain one’s goals are hurt. Over time, we should review and rebalance the securities in our investment portfolio as well as reviewing the allocations we have chosen so as to remain on track to meet our package of financial goals.
When choosing the actual investments to hold in our portfolios, many factors may come into play. Indexed funds or ETFs are popular now because of their typically lower costs and avoidance of major bets, since they instead track a particular index. Actively managed securities and individual stocks may be attractive for their growth potential but do carry additional risk. Other investment goals may involve choosing what are termed socially responsible investments or their flip side – the so-called vice businesses (liquor, tobacco, marijuana, etc.). These investment selections are personal choices and may provide results better or worse than a more traditional broadly diversified investment mix.
These simple steps will make it easier for you to handle your investments and avoid the most common mistakes. It is not always easy to ignore the emotions that affect us when we are thinking about our investments but the better you are able to make decisions that aren’t based on emotion, the better you and your portfolio are likely to fare.
George Chamberlin & Mentor RIA Consulting © 2018