We often talk about the pitfalls of keeping up with the market play-by-play and the havoc daily headlines can wreak on long-term investors. The latest Morningstar Investor Returns data -- Morningstar's measure of actual returns realized by fund investors -- showed that focusing on your account balance can not only cause anxiety, but can impact your bottom line, too.
The report found that at the end of 2013, the 10-year annualized difference between average investor returns and average fund returns was 2.49% . The main cause? Bad timing fueled by emotions. Too often investors are tempted to try to replicate upticks and avoid market losses by changing their investment allocation. When you jump from investment to investment, chasing returns and attempting to time the market, you're likely "buying high," which is exactly the opposite of what investors should do to receive the most consistent returns over a long period of time.
To be successful in the long term, an investor needs time, discipline, and the emotional fortitude to avoid actions that lead to diminished returns. Let's look at three of those behaviors -- and the strategies you should use to correct them.
Frozen by fear. Pride can cause investors to behave foolishly, leading them to hold a losing investment for too long in the hopes it will recover its value. They can't stand the thought of losing money.
What you should do instead: While we don't advocate jumping ship the moment a fund or asset class hits rough water, we also don't advise going down with a sinking vessel. If your investment adviser tells you to cut your losses and move your money to a new investment, think about it like this: what do you believe is the best, most appropriate place for your money? Let go of your pride and move on.
Following the crowd. Investing can be scary, so it's natural to want to stick with the herd. But history shows the herd isn't particularly wise. It's fueled by emotion and frenzy and generally doesn't make the safest or best investing decisions.
What you should do instead: Remember that your co-workers, neighbors, relatives, and other acquaintances are in no position to understand your finances or your investing goals. Your strategy should be highly personal -- there's no "one size fits all" approach.
Losing sight of the big picture. Advances in technology allow us to procure almost anything with the touch of a button, and our live-in-the-moment mindsets make it hard for us to plan for next week -- let alone 30 years down the road. It's easier to focus on the here and now, which could lead to excessive emphasis on short-term market performance.
What you should do instead: Stay engaged and focused by maintaining regular communication with your investment adviser. Focus not on performance, but on how you're tracking toward your retirement goals. You might even make a game of it by starting a "countdown" to your retirement savings goal or retirement date.
Attempting to chase returns via market timing has no place in the strategy of a long-term investor. It's natural to want to make changes when faced with market volatility, but resist the urge to be concerned with day-to-day market fluctuations. Instead, focus on your long-term strategy and make sure that your personal circumstances -- not the movements of the market -- drive any changes to your portfolio.