For long-term investors, keeping a focus on big-picture goals, such as retirement, and not being distracted by day-to-day market moves is key to success. You probably already know this, but it’s a message worth repeating. Investing is a matter of focus. Despite recent disappointments in stock market performance, investors who keep their sights set on long-term investment goals may find that a “forest, not trees” approach to investing offers the greatest potential for success.
Focus is especially important for retirement savers — those who are still in the accumulation stage — as well as for retirees who need to keep the potential for growth alive in their portfolios.
Are You a Micromanager?
As a retirement saver, your employer-sponsored retirement plan gives you the freedom to make your own investment decisions. Because you can easily change the investment holdings inside your plan, you may find yourself becoming a micromanager. That’s an investor who changes investments frequently because of daily market movements instead of focusing on the big picture: a long-term investment strategy. However, “chasing returns” by moving your money into whatever investment type or stock market sector happens to be doing well at the time rarely pays off in the long run. Typically by the time market-moving news hits mainstream media, stocks have already adjusted in price. People who follow trends tend to inadvertently buy-high and sell-low, hurting the long-term performance of their investment.
The Unknowable Future
The problem with chasing returns is that it’s virtually impossible to predict how long a particular investment or market sector will continue to be a top performer. History has shown that it is not unusual for an asset class to go from being the top performer in investment returns one year to the lowest performer the very next year. That can present a problem if you build your investment portfolio based strictly on recent performance.
The Solution: Keep a Long-term Perspective
You may be much better off by the time you retire if you use a “forest, not trees” perspective when you invest. Concentrate on your goal, and choose an investment mix with the potential to help you reach that goal over time.
Your retirement plan offers several investment options, allowing you to choose a well-diversified investment mix for your account. The idea behind long-term investing is to choose a mix that offers you a realistic opportunity to achieve gains while reducing the overall risk to a level you are comfortable with. A Financial Planner can help you to find this balance and design a custom portfolio that matches your risk tolerance level.
After you’ve chosen your investments, you shouldn’t ignore market and economic developments. However, you’ll generally want to stick to your plan unless you decide that a change in your personal situation makes an adjustment necessary, or you discover that your risk tolerance needs revision. Investors who adhere to an investment policy that relies on a well-diversified mix of investments, who are patient with the market’s changing moods, and who have the discipline to set goals and review them on a regular basis may be in the best position to achieve the results they are looking for — despite the market’s short-term gyrations.
If you’re a “forest, not trees” investor, you can be much less concerned with what the markets do on a day-to-day basis. You’ll be free to switch your investments, but you won’t feel compelled to make a move every time the markets zig or zag, and hopefully you’ll sleep better at night too. Consult with your CPA or Certified Financial Planner™ to make sure that your investment strategy makes sense for you and your on the right tract to a successful retirement.