When it comes to managing investments, most Americans are reluctant to shake up their plan -- even if things aren't looking great.
In fact, a recent survey by Principal showed it would take major losses for investors to change course. But is that a good thing?
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Here's how much investors would have to lose to change their strategy
According to Principal, most investors indicated that their accounts would have to decline by more than $20,000 before they would alter their investments.
Around a quarter of Americans said they'd change course if their balance fell between $20,000 and $25,000, while just 11% said they'd alter their plans if they sustained losses between $10,000 and $19,000.
Very few people would abandon their investment strategy after losing less than $10,000. In fact, just 8% would change after $5,000 to $9,999 in losses; 6% after $1,000 to $4,499; and 2% with less than $1,000 lost.
The remainder of investors indicated that they'd need over $20,000 in losses to deviate from their investments plan.
When should you change your investment strategy?
While it's probably good news that most investors plan to stay the course even if things start to go wrong, the reality is that the amount of losses shouldn't necessarily determine whether you stick with your strategy.
Selling when you've taken a substantial hit to your account could be a terrible move. Investments can recover if you stick with them, but if you sell prematurely, you could lock in your losses. There are several key questions to ask before you decide to sell or switch up your strategy:
- Why am I losing money? Is the problem with the companies or funds you've invested in? Or are there extrinsic factors causing the losses that have nothing to do with these specific equities?
- Can my investments recover? Whether it's an internal or external problem, make sure there's potential for recovery. For example, if you've invested in an individual company, consider whether it has cash reserves to weather the crisis as well as a long-term plan for growth.
- Am I confident in my investments? Do you still believe the investment was a good one with the potential to recover and earn money in the future? If so, do you have time to wait for its recovery before you'll need the money? Can you afford to sustain further losses in the short term?
- Am I reacting based on careful analysis? Don't make decisions based on fear or what commentators say. Look at the fundamentals of your investment when deciding how to proceed.
If you're no longer confident in the investments you made, or if you can't afford to sustain more short-term losses because you've invested with money you'll need soon, changing your investment strategy may be sensible -- even if doing so means selling at a loss.
But the last thing you want to do is make rash changes just because you're scared. In fact, being able to hang on through the toughest times can separate good investors from great ones.
