It's widely believed that despite the S&P 500 returning 9.5% in the past 20 years, the average investor has only achieved a 3.6% return. Why is that?
Simply put - behavior. Long-term investing drives long-term performance.
Here are five actions that can reduce the returns on your investments.
Pausing recurring contributions during market weakness
During a market drop, people may feel scared and might consider holding back and waiting until the market recovers before making any moves.
This means that you should not interrupt your investing schedule, especially during times when it is beneficial to invest in the market. One of the best investing strategies is to keep investing every month during market downturns as you will be able to purchase assets at a lower price.
Selling your portfolio due to fear
During a market decline, many people tend to switch to cash because they feel anxious about seeing their account balance decrease. If your investments are in line with your financial plan and timeframe, it is best to hold onto them.
By attempting to time the market by going to cash, you might miss out on the recovery and limit your potential for growth.
Trading in and out of positions
The investment market is filled with numerous options such as "hot stocks", alternative investments, and exciting opportunities, which can be overwhelming to investors.
Pursuing the so-called "get rich quick" schemes can result in letdown and considerable financial loss. Consistent and trustworthy investing may seem tedious, but it is effective.
Accepting cookie-cutter solutions
When you are creating investment accounts such as 401(k) or IRA, you may be given recommended portfolios to choose from. Although these suggestions can provide some assistance, it is important to conduct a personal evaluation of your financial status and risk tolerance. This can potentially be done with the guidance of a fiduciary financial advisor.
If you continuously rely on default suggestions and choose investment options designed for others, it could result in lower returns that may not be suitable for your financial situation in the long run.
Attempting to time the market
Many investors tend to buy stocks when the market is high because it makes them feel positive about the market. Then they sell their investments when the market is low due to fear, and then continue this pattern of buying high and selling low. This results in long-term losses despite regularly investing at a higher price.
Consistently contributing funds over time is a better approach than engaging in behavior that could potentially decrease returns over time. A seasoned financial advisor can help explain the importance of choosing suitable investments that match your risk tolerance.
Create a plan for achieving long-term financial goals and determine significant milestones to strive for in life. Collaborate with a knowledgeable fiduciary advisor to develop a feasible plan. Stay committed to your plan and objectives, even as time goes on. Make sure to schedule regular meetings with your advisor to review your progress and update them on any major changes in your life.