“Chasing returns” by moving your money into whatever investment happens to be doing well at the time rarely pays off in the long run.
For long-term investors, keeping a focus on big-picture goals, such as retirement, and not being distracted by day-to-day market moves is key to success.
It’s a message worth repeating. Investing is a matter of focus. Despite recent volatility in stock market performance, investors who are willing to assess the whole universe of investment choices may find that the market continues to offer new possibilities. And those who keep their sights set on long-term investment goals may find that a “forest, not trees” approach to investing offers the greatest potential for success.
Focus is especially important for retirement savers — those who are still in the accumulation stage — as well as for retirees who need to keep the potential for growth alive in their portfolios.
Are You a Micromanager?
As a retirement saver, your employer-sponsored retirement plan gives you the freedom to make your own investment decisions. And because you can easily change plan investments, you may find yourself becoming a micromanager. That’s an investor who changes investments frequently because of daily market movements instead of focusing on the big picture: a long-term investment strategy. But “chasing returns” by moving your money into whatever investment type or stock market sector happens to be doing well at the time rarely pays off in the long run.
The Unknowable Future
The problem with chasing returns is that it’s virtually impossible to predict how long a particular investment or market sector will continue to be a top performer. Eventually, another investment or sector will probably take over the lead, and there will be little or no advance warning. That can leave you in the lurch if you changed the investment mix of your retirement plan account based strictly on recent performance.
The Solution: Keep a Long-term Perspective
You may be much better off by the time you retire if you use a “forest, not trees” perspective when you invest. Concentrate on your goal, and choose an investment mix with the potential to help you reach that goal over time.
Your retirement plan offers several investment options, allowing you to choose a well-diversified investment mix for your account. The idea behind long-term investing is to choose a mix that offers you a realistic opportunity to achieve gains while reducing the overall risk to a level you are comfortable with.
After you’ve chosen your investments, you shouldn’t ignore market and economic developments. But you’ll generally want to stay with your plan unless you decide that changes in your personal situation or risk tolerance make an adjustment necessary.
If you’re a “forest, not trees” investor, you can be much less concerned with what the markets do on a day-to-day basis. You’ll be free to switch your investments, but you won’t feel compelled to make a move every time the markets zig or zag.
Do you wonder if you have the right investment strategy? Send us an email or give us a call at 925-292-5936 to discuss how we can help.
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Meritage Wealth Advisory, a local member of FPA.