Your behavior is the most important factor for investment success. Even if you do manage to pick the best performing investments, (which is something professional mutual fund managers can’t even do consistently as shown here) panicking out of those investments during a downturn will likely cause permanent damage to your finances.
Here are a few tips to help you avoid behavioral mistakes and survive whatever the market sends your way.
Tip 1: Reassess your risk tolerance.
Using a questionnaire to determine your risk tolerance is a lot different than actually seeing your portfolio decline in value during a downturn. If your reaction to the recent market volatility was different than what you thought it would be, then you might need to adjust your stock exposure accordingly. Just be sure that your new mix doesn’t take you off track to achieve your goals.
Tip 2: Turn off the financial news.
The financial press doesn’t have a personal stake in your financial goals, so don’t put your finances at risk by reacting to the latest “doom and gloom” headline. Instead, take a break from the financial news if it’s causing you to worry and turn to a professional when you want personalized advice.
Tip 3: Cash is king.
Cash is important for several reasons. Along with helping you cover unexpected expenses, having cash on hand can calm your nerves when the market is falling as well as position you take advantage of a buying opportunity. But be sure not to hold too much cash since doing so could keep your net worth from growing enough to reach large financial goals like retirement.
Tip 4: Reassess your expectations about future returns.
Base your financial planning projections on realistic investment returns. The huge gains over the past several years are a result of the market’s strong recovery from the ’08-’09 downturn, so don’t count on them to continue long-term. It’s better to use a conservative estimate for your portfolio’s performance and be surprised to the upside rather than to realize you won’t be able to retire because you didn’t get the 10%+ annual returns that you’d hoped for.
Tip 5: Don’t leave your financial future up to chance.
No one cares more about your financial success than you do, so make sure you understand the “what,” “why,” and “how” of any financial advice you receive. And consider getting a second opinion from a professional if you’re a “do-it-yourself” investor.
