By Sheryl Rowling
SAN DIEGO — When it comes to investing, boring is best. Put your money into a diversified portfolio of low-cost mutual funds, rebalance periodically, and forget about it! If you have significant assets, consider using a fee-only advisor (www.napfa.org) who can manage for tax efficiency as well. After all, saving taxes can boost your returns by 20-30 percent with no added risk!
Why is it that investors have a hard time hanging in for the long term? Emotions are to blame! Here are five tendencies to avoid:
- Looking at the market every day. This practice will just make you nervous and on edge. If you think you will gain valuable insight in order to take action, think again: the market has already reacted! The market is volatile. That’s why you get returns better than a savings account. Accept that there will be ups and downs. Find something better to do with your time!
- Listening to the media. If you listen to the experts, you can find all kinds of very intellectual opinions. The truth is that nobody can predict the market. Think about what gets on TV; it is sensationalism! Viewers won’t be captured if the expect says “Stay the course.” It’s boring!
- Paying attention to the Dow or S&P500. If you have a diversified portfolio, your investments won’t react as much as the Dow or S&P500. That’s because your portfolio is made up of all kinds of other investments such as small cap stocks, bonds, international stocks and real estate. If these indexes go up by 20 percent, don’t expect your portfolio to move up accordingly. On the other hand, if these indexes drop by 20 percent, you can expect to feel less pain in your portfolio.
- Selling low and buying high. When the market is down, many investors believe the sky is falling. You can hear the chorus of “I can’t afford to take any more losses.” These investors sell low, ensuring that they lock in the temporary losses. When the market recovers, the tune changes to “I need to invest!” In other words, it’s time to buy high. When you take the emotion out, rebalancing will slice off a little of the high-risers and buy some of the bargains. Over time, this adds value.
- Trusting the wrong person. Do you listen to hot tips from a friend? Stick with a commissioned broker because he buys you a steak dinner once a year? Look for a Registered Investment Advisor – they are the only ones required by law to put your best interests first (“fiduciary duty”). Fee-only advisor get no commissions or kick-backs; they only get paid by you. Find an advisor who focuses on diversification and tax savings. That will bring you long-term successful investing.
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Sheryl Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com