Keep pace with soaring stocks
3 behaviors can harm returns
The stock market has raced to record highs this year, but your portfolio may not show it.
In some ways, that’s to be expected. You would have to be 100% invested in stocks to mirror the market’s performance, and that kind of aggressive allocation may not be appropriate for your risk tolerance or time horizon.
But generally speaking, if the market is having a good year, your portfolio should be, too. If it’s not, you may want to point a finger toward yourself.
“The greatest risk is not the volatility of the market but the volatility of your own behavior,” says Daniel Crosby, a behavioral finance expert and founder of the investment management firm Nocturne Capital.
Here are three behaviors that are most likely to drag down your returns, along with strategies to counteract them.
Overtrading
The vast majority of long-term investors shouldn’t trade frequently; those who do open themselves up not just to more risk but also to increased transaction fees and tax consequences, both of which can drag down returns.
“One of the reasons investors trade more than they should is that they think they know more than they do,” says Terrance Odean, a professor of finance at the University of California, Berkeley, who researches investor behavior.
If you tend to keep an enthusiastic finger on the buy or sell button, stay away from individual stocks and their volatility, which can tempt you to make frequent trades. Instead, invest through index funds, which passively track a segment of the market.
Unwillingness to lose
“We hate loss more than twice as much as we like comparably sized gains. Win $50 at a casino and it’s kind of ‘meh’ but lose $50 out of your wallet and it ruins your night,” Crosby says. Because of that, we may hold on to poor investments longer than we should to put off recognizing a loss, or flee to cash at any sign of a downturn.
It’s worth regularly evaluating and potentially letting go of market outliers that are suffering sustained losses or investments that no longer fit your long-term plan.
Take off the blinders
If you read only political websites that align with your views, you already know what this means: It’s the tendency to discount information that discredits your beliefs.
As investors, we do this in part because we put money behind the decision we’ve made. We don’t want to hear it’s a bad one.
So when you rebalance your portfolio or re-evaluate your strategy, look at each investment as if you’re buying it for the first time, and dive into research from varied sources.