A few weeks ago I penned a post highlighting some of the most important things I recommend doing in volatile markets. In light of the continued volatility, I thought I would provide some additional thoughts on what can be done to provide perspective and help ease any anxiety you may feel about your investment portfolio.
1) Focus on your number. Do you recall the Fidelity commercials that were popular in the not so distant past about “knowing your number?” They were designed to get investors to focus on their own individual plan. My point in bringing that up is probably obvious. Good portfolio performance is always the result of a strategic plan. However, performance (e.g. investment returns) is just a metric. Focus on reviewing the merits of the plan not interim individual investment performance. Granted, one will inevitably lead to the other, but in my experience, investors often judge a plan by the performance of individual investments not the aggregate plan. There are no solo acts in the portfolio, think of your portfolio as an orchestra.
TAKEAWAY (a big one!): Conduct a periodic review of your plan with your advisor, and judge whether or not goals are being fulfilled instead of whether you are beating the market. Most of the times, this revolves around a number needed for retirement which may take a little work on your part to create a monthly budget. Most advisors can help you estimate what this number will be well into your retirement years.
2) Put on a different set of lenses to avoid inherent biases. Behavioral finance has grown as a discipline greatly in the last decade and half or so–just Google it. I won’t be able to do justice to all the research in this venue, but will highlight the four biases I see the most often as a practicing investment consultant. These are just behaviors to be aware of in order to get the most out of your investment experience.
Overconfidence– you weight the accuracy of your information more heavily than needed and feel your timing is never off. For instance, you feel your ownership of Apple products and overall knowledge of Apple as a company justifies the overweight position in your investment portfolio, but in reality you need to diversify.
Regret avoidance – you let past mistakes prevent you from moving forward with good advice. For example, you discount sound recommendations by your financial advisor because it reminds you of mistakes previously made in your portfolio.
Loss aversion – making sure you avoid losses is weighted more heavily than achieving gains. So although you are able to assume more risk than average (i.e. because of your wealth), you choose not to because of your fear.
Confirmation bias – you tend to seek out and notice what confirms your own beliefs at the expense of undervaluing other information
TAKEAWAY: Sometimes seeing things from another angle helps.
(Next time we’ll cover the rest of the list…)