Whenever you pick up a newspaper, visit a news site, or listen to the radio, you’re bombarded by the trendy investment advice of the moment or exaggerated claims on how to beat the markets. It's difficult for even the savviest of women to avoid falling prey to these tips made by pundits or so-called experts.
One of the most common investment myths the media (and even many advisors) spout is that the performance of your investments is the most important factor for achieving a successful retirement strategy. This may sound like common sense, but it’s far from the truth.
The Myth Behind the Claim
The reality is that long-term portfolio returns are only somewhat affected by the relative performance of investments. There’s no guarantee that an advisor’s particular choice of investments can outperform competitors’ investments. The success of your retirement plan doesn’t hinge on the S&P 500 Index or your ability to beat the market. You may see some success in the short-term, but it’s not the most critical factor when you retire.
The More Important Factor for Success
Rather than performance, it’s our behavior that impacts the success of our returns. How we respond and react to market fluctuations — and, particularly, market exuberance and its inevitable crashes — has an enormous impact on our financial success. And ironically, trying to outperform the markets often results in below average returns.
Multiple studies have analyzed how our emotions play into our investing results, especially when we chase above average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. Simply put, behavioral biases lead to poor investment decision-making.
If you think about it, it makes sense. Finance is an emotional and personal topic for most people. It can cause stress, grief, excitement, wonder, and any number of other emotions. So when we think we have the opportunity to cash in on high returns, we may let our emotions guide our decisions. We buy high and sell low to avoid losses or cash in on a possible windfall, even when we know that, long-term, that is a bad strategy.
Other behaviors that can negatively impact your financial success are not maintaining a liquid emergency fund and drawing down your retirement accounts for non-retirement expenses. Over time, these habits lower our overall return and put our financial plan at risk.
Practicing Good Behavior
Often, people make emotionally-driven decisions because they have an investment strategy, but not an investment philosophy that is grounded in their values and supported by academic evidence. Furthermore, working with a trusted financial advisor, who understands that investor behavior is the key determinant of financial success, can help you achieve higher returns by avoiding mistakes.
Let’s review three ways you can use your behavior to help your investments:
- Focus on the long-term. The markets are always changing. If you check your performance every time there’s a shift in the markets, you may end up feeling constantly overwhelmed and stressed. Maintain a long-term perspective and stay disciplined in your approach.
- Avoid high-cost investments. It’s elementary math — gross return less costs equals net return. Keep an eye out for hidden fees or high costs, as they can quickly eat away at your assets.
- Maintain proper asset allocation. Your portfolio should be reviewed annually to make sure it still reflects your appropriate level of risk. If it doesn’t, it may need rebalancing to keep your portfolio on the right track. We like to meet with clients at least once a year to review their portfolio and make adjustments as needed.
Staying Focused on the Measurement That Matters
The only guarantee in finance is that there are no guarantees. Market performance and this year’s hottest stock picks rarely leads investors to financial success. What matters most is applying the right behaviors to a personalized strategy based on your specific goals and needs.
Ask yourself: has your advisor talked with you about investor behavior? Has your advisor claimed to be able to help you outperform the markets?
By using a disciplined approach, focusing on the long-term, and working with an objective advisor who understands investor behavior, you can work toward your goals and a successful retirement. To learn more about your investment portfolio and the factors that matter for your circumstances and needs, call us today at 858.756.0004 or email [email protected] to set up a consultation. We look forward to helping you feel confident with your investments and future financial goals.
About Deb Sims
Deborah Sims is the Principal of Estate Management Group, a wealth management and financial services firm offering comprehensive and customized strategies to help her clients manage their assets and feel confident in their future. Her mission is to serve as her clients’ most trusted wealth advisor through professional knowledge, integrity, and personalized wealth management services. Based in San Diego, California, Deb’s team has offices in Rancho Santa Fe, Old Town, and Del Mar. She invites you to contact her team today to learn more about how they can help you.