What words come to mind when you think about your personality traits? Impulsive? Confident? Organized? Now think about how you make investing decisions. Would the same words apply?
Certain psychological traits can influence your investment decisions — often at the expense of logic. The result could be investment returns that don’t match your expectations.
Consider the characteristics described below. Could any of these be sabotaging your investment success?
Fear of Losses
Falling stock prices can send many investors into “sell” mode. Fearful investors are often more upset over investment losses than they are happy about gains. As soon as they experience a small loss, fearful investors may move their money out of the market. To make matters worse, they often wait for a rebound before reinvesting. But this strategy may result in lower returns than staying invested and waiting out the downturn.
Minimize the temptation to move money out of stocks after a minor loss by making sure your portfolio has a diversified asset mix based on your time horizon and risk tolerance. If that task sounds intimidating, consider a target-date fund, such as one of the MERS Retirement Strategies. Target date funds include a diversified blend of investments that automatically adjust your risk as you move toward, and through, retirement.
Most people save money toward a variety of goals — some that are short term and others that are far in the future. But some investors are so focused on their present needs that they put off saving for long-term goals. That procrastination can keep them from accumulating a large enough nest egg to fund a comfortable retirement.
You can help prevent a shortfall at retirement by having a specific amount of money automatically deducted from each paycheck and invested in your employer’s retirement plan or other investment accounts. Having an automatic savings plan can keep you on track to reach long-term goals.
Overestimating your investing knowledge and abilities can lead to mistakes that may sabotage long-term investment performance. Trading investments frequently in an attempt to increase returns can result in higher transaction costs and significant tax liabilities when investments are held in taxable accounts. Keeping track of costs can shed some light on just how costly frequent trading can be. Having a well-designed investing strategy that you stick with through market ups and downs can deter you from frequent trading that may lower returns.
Buying and selling investments haphazardly can wreak havoc on a portfolio. For example, a stock whose price has dropped may or may not be a good value, depending on the reasons for the price decline. Before making purchase decisions, it’s important to identify how you anticipate the investment will function in your portfolio. Keeping good notes can help you determine if replacing an investment you currently own makes sense. By reviewing your original reasons for purchasing the investment, you’ll be able to see if its performance has lived up to your expectations. If it hasn’t, you can look for a replacement that’s a better fit with your investing strategy and doesn’t duplicate anything that’s already in your portfolio.