Too often our emotions can be the biggest risk to our investment success. In these situations, it’s important to take a “timeout” and remember why you’re investing – your retirement, your child’s education, your legacy. A short-term market decline doesn’t change these long-term goals. A timeout can help you review your goals and objectives, recognize behaviors that could cause trouble and avoid making emotional investment decisions.
Why is it so important to be on your best “investing” behavior? Poor investing behavior can lead to poor diversification, chasing performance, and moving into and out of the markets (often at the wrong time). The typical result of these behaviors is poor long-term performance, which could lead to the biggest risk of all: not reaching your long-term financial goals.
For example, the average annual return for a balanced portfolio (65% equity and 35% fixed income) over the past 20 years was 6.7%. However, the average U.S. investor received a 3.3% return due to his or her investing behavior. But with the power of compounding, the difference wasn’t simply 3.3% per year; it could have been $180,000 over that 20-year time frame if they earned these returns each year.
How Investing Behavior Could Lead to Poor Performance
When you feel your emotions beginning to get the better of you, take a timeout and work with your financial advisor to review your goals before making what could be an emotional investing decision. Your portfolio, and your future self, will thank you.
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