It can often feel like the older we get, the faster the merry-go-round spins. We become busy working professionals, husbands or wives, parents, and active community members. Our plates get incredibly full at some point, and there’s no sign of things slowing down.
Your life is full of responsibilities that are constantly competing for attention. So, while there are many things in life that you need to be able to control, money is one aspect that you don’t have to manage all on your own. Here’s a breakdown of why your need to control your wealth could hinder your ability to achieve financial independence and fulfillment.
Don’t Forget: You Can’t Control the Market
Most investors wish they had a crystal ball that could help them control and predict what the stock market does. But, unfortunately, it’s out of their hands.
The need for control is like any other emotion, meaning it can lead to quick decisions driven by gut reactions. However, emotional decisions tend to cause more harm than good when it comes to your finances. Why? Because emotionally based decisions are rash responses to short-term happenings. What’s better for your financial well-being? Education-based decisions that focus on your long-term goals rather than in-the-moment events. In other words, quick responses aren’t usually done in your best interest.
Next time you see a headline about market drops or volatility, don’t panic! The economic cycle will always, inevitably hit a rough patch. But how you choose to respond (or not respond) to short-term changes can serve you best over the long run.
What We Do Know About the Market
The market is unpredictable, but there are a few things we know. First, when the market drops, it can trigger a habit called “timing the market.”
Timing the market refers to moving your investments in and out of the market based on predictions of how the market will perform. This is a form of active investing, and it’s the opposite of a passive, or buy-and-hold, investment strategy.
The problem is that timing the market requires extreme daily attention to the market’s movements and your portfolio. This typically isn’t feasible for the average investor and can lead to more emotionally driven decision-making and fatigue. Not to mention, active investing requires more day-to-day transactions, which means you’re spending more money on transaction costs and may be subject to short-term capital gains tax.
There’s no giant neon sign signaling when the market will change. You’ve likely heard that past performance is not indicative of future results, and that’s because there’s always some sort of risk involved with investing funds — despite any possible patterns or past successes investors may identify.
Why Staying Invested Matters
A 2019 JP Morgan study found that most of the market’s best-performing days came directly after the worst. Specifically, six of the 10 best market days occurred within two weeks of the 10 worst days.1
If you want even more reason to stay invested through the ups and downs, consider this: Investors who missed those top 10 days in the market saw their returns cut nearly in half over 20 years.
The lesson here is that staying invested in the market long-term makes more sense than trying to time it. If you’re not paying attention or miss the best days, your portfolio could take a huge hit.
What Makes a Solid Portfolio?
There are a few key “ingredients” to building and maintaining a solid portfolio that aligns with your future goals.
Diversification: You’ve likely heard the phrase, “Don’t put all your eggs in one basket.” It may be a cliche, but that’s because it’s true! Diversification is what helps protect your portfolio from huge losses. Having a variety of investments in different sectors means that when one ship sinks, it won’t take your whole portfolio down with it. Different investment types include stocks, bonds, mutual funds, ETFs, employer stocks, and alternative investments like precious metals or real estate.
Long-term outlook: Investing is a long-term strategy, and the market rewards those with patience. Your portfolio should be built with a long-term outlook, meaning you want to make sure your investments are designed to continue growing over time.
Cost-efficiency: The point of having a portfolio is to grow your wealth. You’ll want to build your portfolio in a way that helps ensure your investment gains outweigh the cost of maintaining it. As we mentioned, active investing tends to increase the costs associated with your investments without necessarily increasing overall performance.
Remember Why You Invest
You should not be investing for instant gratification. Investing is a long-term commitment, and it’s a journey that you don’t have to go on alone. A financial advisor can help you evaluate your goals, risk tolerance, and risk capacity to build a portfolio that reflects your needs today and vision for the future.
At Brightview, we gather all the facts about you and your financial life to create an investment allocation tailored to you. If you’d like to learn more about investing with a professional, don’t hesitate to schedule a time to talk.
Sources:
1Guide to Retirement