Investing always carries risk. You know this when you first place your money into the stock market, but sometimes, it doesn’t really hit home until you watch your portfolio balance drop day after day. Then, you immediately want to launch into damage-control mode. But sometimes, this can do more harm than good.
Often, the best thing you can do is also the most difficult: nothing at all. Here’s why: Emotional investing is usually bad investing.
Some people’s response to seeing their portfolio tank is to immediately pull their money out to stop things from getting worse. But that’s usually based on the faulty assumption that things are never going to get better. In reality, that’s usually not the case. The S&P 500 has a compound average annual growth rate of 10.7% over the last 30 years, and that’s despite huge losses in several of those years.
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Emotional investing can turn a short-term loss into a permanent one
When you sell off investments that are doing badly at the moment, what you’re often doing is turning what would’ve been a short-term loss into a permanent one. Had you left your investments alone, they may have recovered in time.
There definitely are situations where you should make some changes to your investment strategy. Putting all your money in a handful of stocks or a single industry can be dangerous. If those companies make some poor decisions or the industry faces a major setback, you could lose a lot of money. So make sure you’ve diversified your portfolio by investing in at least 25 different companies across various market sectors.
An index fund is a great option for most investors. They’re affordable and they spread your money around many companies so no single one affects your portfolio too much. You can find these with just about any broker. They often contain the name of their benchmark index within the fund name.
You might also want to reevaluate your risk tolerance. You don’t want all your money in stocks if you’re on the verge of retirement. There’s too big of a chance that a bear market could wipe out a huge chunk of your savings. Don’t keep more than 110% minus your age in stocks. If you’re 50, that means keeping 60% in stocks and 40% in bonds. This can help you protect what you have.
You could also try a target date fund if you want to be even more hands-off. These are bundles of investments that automatically grow more conservative over time. Each fund has a target year listed in its name. However, these funds aren’t always the most affordable option.
Target-date funds: Is your money in one?
How to safely ignore your investments
Once you’ve looked over your portfolio and ensured that your money is diversified appropriately and that your investments match your risk tolerance, try to let things run on autopilot for a while.
See if you can set up automatic contributions to the account so you don’t have to make them manually. If you have a 401(k), you should be able to do this and change your contribution amounts through an online account or by talking to your HR department. Many IRAs and taxable brokerage accounts will enable you to link a bank account and set up an automatic transfer.
Avoid checking your portfolio daily or even weekly. If you don’t plan to use your money within the next five to seven years, these daily swings shouldn’t matter to you that much. And if you do plan to use your money sooner, it probably shouldn’t be invested in the first place.
Find other things to distract yourself with and limit your portfolio checks to a few times a year. If you still find you’re losing money, try to stay objective. Think about the investment’s long-term growth potential. If you believe it’s going to do well, stay the course.
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