Why ignoring your investments could be good for your finances right now

0
Why ignoring your investments could be good for your finances right now

IInvesting always involves risk. You know this when you first put your money in the stock market, but sometimes it doesn’t really hit home until you see your portfolio balance drop day after day. Then you immediately want to jump into damage control mode. But sometimes it can do more harm than good.

Often, the best thing to do is also the hardest: nothing at all. Here’s why.

Smiling person holding a cup of coffee and looking out a sunny window.

Image source: Getty Images.

Emotional investment is generally a bad investment

Some people’s response to the sight of their wallet tank is to withdraw their money immediately to prevent things from getting worse. But that’s usually based on the mistaken assumption that things will never get better. In reality, this is generally not the case. The S&P500 has a compound average annual growth rate of 10.7% over the past 30 years, despite huge losses in many of those years.

When you sell investments that are doing poorly right now, you often turn what would have been a short-term loss into a permanent loss. If you had left your investments alone, they might have recovered over time.

There are definitely times when you should make changes to your investment strategy. Putting all your money in a handful of stocks or in a single industry can be dangerous. If these companies make bad decisions or if the industry faces a major setback, you could lose a lot of money. So make sure you have diversified your portfolio by investing in at least 25 different companies across various market sectors.

A index fund is a great option for most investors. They are affordable and they spread your money among many companies so that none of them affect your wallet too much. You can find them with just about any broker. They often contain the name of their benchmark index in the name of the fund.

You may also want to reassess your risk tolerance. You don’t want all your money in stocks if you’re about to retire. There’s too much of a chance that a bear market could wipe out a big chunk of your savings. Do not keep more than 110% minus your age in stocks. If you’re 50, that means keeping 60% stocks and 40% bonds. It can help you protect what you have.

You can also try a target date fund if you want to be even more independent. These are sets of investments that automatically become more conservative over time. Each fund has a target year listed in its name. However, these funds are not always the most affordable option.

How to Safely Ignore Your Investments

Once you’ve reviewed your portfolio and made sure your money is well-diversified and your investments match your risk tolerance, try to let things run on autopilot for a while.

See if you can set up automatic account contributions so you don’t have to make them manually. If you have a 401(k), you should be able to do this and change your contribution amounts via an online account or by contacting your human resources department. Many IRA and taxable brokerage accounts will allow you to link a bank account and set up direct deposit.

Avoid checking your wallet daily or even weekly. If you don’t plan to use your money for the next five to seven years, these daily fluctuations shouldn’t be of such interest to you. And if you plan to use your money sooner, it probably shouldn’t be invested in the first place.

Find other things to distract yourself with and limit your portfolio checks to a few times a year. If you still find yourself losing money, try to stay objective. Consider the long-term growth potential of the investment. If you think it’s going to be okay, stay the course.

10 stocks we like better than Walmart
When our award-winning team of analysts have investment advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They have just revealed what they believe to be the ten best stocks for investors to buy now…and Walmart wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

Equity Advisor Returns 2/14/21

The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

LEAVE A REPLY

Please enter your comment!
Please enter your name here