Once you have decided on your investment portfolio’s asset allocation, you are happy with the diversified and low fee portfolio you have created with a qualified financial planner (or on your own), and you are investing according to the plan, what are you supposed to do next?
Here is where most people get in their own way when it comes to investing. As human beings we constantly question and challenge our decisions. We hear of something ‘hot’ and want to be a part of it. We are told about a fund manager who has beat the market for each of the past 5 years and want to jump on board. We lose patience, sell and buy something new.
Flipping has a number of costs. You may need to pay redemption fees (with back-load mutual funds), trading fees (with stocks or ETFs) or be asked to wait several weeks (!) while money is ‘in transfer’ between institutions. Timing an investment purchase correctly is easier said than done – and regret is often the result because when it comes to timing the market, you’re as likely to fail as succeed.
How do you avoid the ‘grass is greener’ mentality? Go back to your goals. What are you trying to achieve? If your goal is a comfortable retirement, your asset allocation is correct, and your portfolio is well-diversified and cheap (meaning low fees), you should rest easy knowing you are doing what the top pension fund managers are doing: letting good decisions play out over the coming decades, and ignoring the inevitable ups and downs.
The person who ‘pulls the tree up by its roots every year to see if it’s growing’ will quickly find out that it won’t. If someone flips once, they’ll likely flip again, and the result can be disastrous on a portfolio. It’s called ‘chasing returns’ – and it can result in an overall portfolio return that is half of that of the market (or worse).
I love the stories about people who bought a stock or fund of some kind, forgot about it, and then found out that over a couple of decades it had multiplied several times over in value. What if they were tracking its progress every day? How long might they have kept it then? And how many ways would there have been to lose that capital by hoping to succeed again somewhere else?
The industry is full of people who benefit from you changing your position. If a salesperson can cast even the faintest doubt in your mind that perhaps there is a better way, a better stock, a better brand, a better money manager you may find yourself worse off in a year. A lot of profit is made in this industry from people changing their mind, and the salespeople are the winners.
To really have your eyes opened, read ‘Pound Foolish – Exposing the Dark Side of the Personal Finance Industry’ by Helaine Olen. Empower yourself with unbiased information from authors you can find on my website and you’ll be ready to stick to your guns. Next week I’ll write about why this is easier said than done.
Yes, winning in the financial world requires patience and a ‘buy it and forget about it’ mentality (Warren Buffet would agree). It’s not easy for most of us. If you want to be more active, I recommend you take 10% of your investment portfolio (or a percentage of it that you can afford to lose) and play away. Do whatever you want with it. But when it comes to the majority of your portfolio that you want to work hard for you, and help you achieve your goals, trust in your well-thought through decisions. Let inertia do its thing. Your future self will thank you for your patience.