Clients often ask us about the stock market performance. They’re worried about a recent down turn, wondering if they should invest in Snapchat, etc. We get it! It’s easy to get swept up in stories of people becoming bitcoin billionaires or losing everything on one bad investment.
Thing is, for most people, that’s not how you get rich. In fact, it’s the opposite. The secret to building lasting wealth is to invest in a diversified portfolio, and then…ignore it.
Might sound crazy, but this Fidelity study found that the investors who enjoyed the best performance at their firm were those who forgot they had an account. Mind blown yet?
Here are three more reasons not to worry about the day-to-day, or even year-to-year, performance of your portfolio.
1. Your instincts are (probably) wrong
When the market experiences a downturn, it’s human nature to panic and sell your investments to minimize losses. But, if you’re in your 20s or 30s, that’s the opposite of what you should be doing. Historically, you’d be better off buying more when the market is down. The same Fidelity study found that the shorter one holds a stock, the more likely they are to lose money.
In other words, messing with your investments will probably do more harm than good. Take Warren Buffett’s million-dollar gamble with hedge fund Protégé Partners. In 2008, Buffett bet that if he invested in an index fund and left it alone for 10 years, he would make more than the savviest professional investor taking a more hands-on approach throughout the same time period. He won by a long shot. His investment, the Vanguard 500 Index Fund Admiral Shares, earned an average of 7.1% annually; Protégé Partners investments returned a mere 2.2%.
2. If you’re invested for the long term (and you should be), day-to-day ups and downs are irrelevant.
We’ve said it a hundred times, but it’s worth repeating – investing for short-term goals is just gambling. You should only be invested for mid- to long-term goals, those 3 or more years out.
Mid- to long-term goals include retirement, paying for your child’s college education, or saving for a vacation home. They don’t include traveling to Croatia next summer for yacht week. For any goal that’s less than 3 years away, simply setting up automatic contributions to a high-yield savings account is a smarter strategy.
Why? Because investing takes time to work. Usually a long time. You only reap the benefits of compounding interest by waiting. If you need a refresher on why Albert Einstein loved compounding interest so much, read this quick story about a penny.
In other words, messing with your investments will probably do more harm than good.
In addition to being inefficient, short-term investing also poses a huge risk. Day-to-day, markets can experience big ups and downs. If you absolutely need the money you invested one year from now, and the market is down when it’s time to withdraw, you’re screwed. The money you need isn’t there, and you don’t have the flexibility let it recover.
You do, however, have that flexibility with longer-term goals. For example, if the market is down the year you planned to retire, you can delay either retirement, or use other assets, not tied to the market, as retirement income that year. This strategy gives your invested assets time to bounce back.
3. Your portfolio shouldn’t look anything like the market.
Everyone obsesses over what “the market” (AKA the major benchmarks like the S&P 500 and the Dow Jones Industrial Average) is doing. But those benchmarks are only measuring the performance of the stocks in that index. An ideal investment portfolio has stocks in it, including ones that aren’t in that index. It also has a fair amount of other assets, like bonds, commodities, and real estate, to balance risk.
Think of it this way—if you’re doing a full circuit workout at the gym, you don’t focus all your energy on the crunches. You put equal effort into all the exercises, because they’re all important to staying in good shape. Market performance is only one part of a much bigger picture, and stressing about it is useless, so stop doing it!
If you any questions, or tips on how to stop worrying about your portfolio, please leave a comment below and for more articles like this on investing like a pro, click here.