We are surrounded by a cacophony of media and purported “experts” trying to tell us how to make money in the investment markets. It’s human nature to think we can outsmart those around us. The problem is – research shows that following this type of advice is actually detrimental to your long-term investment success.
And it’ll leave you feeling stressed and overwhelmed to boot! The best approach is to focus on the things you can control and ignore the things you can’t. The focus should be on saving and reducing fees and taxes, while building a well-diversified portfolio that should generate the returns you need to achieve your goals. Ignore the noise in the media and stop trying to predict what the market will do in the future. Remember, it’s about you, not about the market!
- Invest Wisely. So how does one do this, you ask? Either use an online calculator or work with a financial advisor to determine what rate of return you need to achieve your goals and develop a well-diversified portfolio with an appropriate level of risk to achieve those goals. Instead of using high-cost, tax-inefficient actively-managed mutual funds that attempt to beat the market, use low-cost, tax-efficient index funds and exchange-traded funds (ETFs) to capture the return available in the market. The chart below shows that a very small percentage of active managers beat their benchmark. Why pay their higher fees on the hopes that you choose the few winners?
- Rebalance Regularly. At least once a year, re-visit where your portfolio stands relative to your asset allocation targets. If it has drifted, rebalance back to your targets. This will force you to sell high and buy low, which is good investor behavior.
- Ignore the Noise. This one is easy. Turn off Jim Cramer and CNBC. Stop reading the daily market updates in the Wall Street Journal and investing articles in magazines like Forbes and Money. The media is good at creating hysteria and a desire to do something. Most people can’t beat the market or time the market successfully over time. If you remove this noise, it’ll be easier to focus on your long-term goals and invest calmly.
- Get Help. If you are finding it hard to resist the siren call of Jim Cramer and continue to obsess about what stock or fund to buy to beat the market tomorrow, then you might want to hire a financial advisor as an objective 3rd party between you and your money. Vanguard research estimates that working with a professional advisor can add up to 3% per year to your returns through things like asset allocation and tax-efficient asset location and loss harvesting, but almost half of the value-add is from “behavioral coaching”. This basically means preventing you from making bad investment decisions.
Investing wisely is not easy in today’s 24/7 media-obsessed world, but it can be done. Focus on what you can control and ignore those you can’t. Then go out and do something you enjoy!