With April wrapped up and my estimated taxes paid, I decided to follow my own advice and check into our retirement accounts to make everything was being distributed according to our plans.
Last week I did some ‘spring cleaning’ and sold some stocks. I had bought years ago based on surface level research (aka reading and digging around the web). They had all increased since I had bought them which was a plus, but they didn’t match my target asset allocation, so I sold them.
The goal is for me to remove bad investing behavior, such investing based on the emotion and hype and instead focus on building a solid and sustainable portfolio.
Avoid Bad Investing Behavior
There can be a huge difference between investment returns vs investor returns. Why? Most cases, the reason is human behavior. While we may know what we should be doing, we tend to react to news about the market in a very emotional way, such as buying or selling at the wrong times.
You’re Not an Investment Guru
Even if we think we are more knowledgeable than the typical investor, studies have proven we’re more likely to benefit from following a systemic approach with investing than going with our ‘instincts’. David Swensen, Yale’s investment portfolio manager who has track record of great returns, has commented that regular investors simply don’t have the resources to keep up with the market by stock picking. He advises a portfolio with diversified mix of index funds.
- 30% Domestic stock funds
- 20% Real estate investment trust
- 15% U.S. Treasury bonds
- 15% U.S. Treasury inflation-protected securities
- 15% Foreign developed-market stock funds
- 5% Emerging-market stock funds
Too Much Noise
Everyday we are bombarded with the people and experts declaring the biggest stocks to buy (or sell). Fortunately (or unfortunately depending on your viewpoint) it’s mainly noise that you can ignore. The concept of noise vs signals is recognizing the inconsequential and useless information and instead finding the actually meaningful information and using that to adjust your portfolio as necessary.
How can you cut back on the noise?
- Remind yourself of your plan. Keep a post it or note about what your target asset allocation is for your portfolio. Have your reasons why you chose this accessible so you can refer to it when you’re tempted to chase a ‘hot tip’.
- Check the data yourself. News pieces tend to focus on the narrative or story, but that doesn’t give the whole picture. You have to be comfortable with the data behind the story. Does it make sense to you? If you don’t feel comfortable understanding it or perhaps with the argument, then hold off on acting on the ‘tip’.
- Be selective with your sources. Choose your investing sources widely and ask yourself, what is the credibility of this site or show? What is their goal and how do they make money? And yes, that includes personal finances blogs. A good many (including Couple Money) have some sort of partnership with companies, that doesn’t necessarily make it bad, but you should factor that into your decision.
Not Having It Automatic
The last major mistake investor makes is not having a plan or schedule for their contributions and instead trying to time the market. It’s impossible to predict the market, so most times, it’s better for you to go ahead and just make regular investments. One way to take care of that is to automate them.
Once you’re set with your contributions, you can fine tune it by having a schedule to review and adjust your portfolio’s holding so you maintain your plan. My husband’s account at Betterment takes care of that for him. If your broker doesn’t offer automatic re-balancing, then set it on your calender to check up on your portfolio on a quarterly basis.
Why is it important to keep your asset allocation in check? Asset allocation is about maximizing your portfolio’s return while minimizing your risk. If you are willing to knock out your bad habits and focus on your goals and the fundamentals, you can boost your returns.
Not Getting a Portfolio Review
Even if you think things are going well, it’s also handy to do a check up on your portfolio to make sure things are truly squared away. Besides making sure that your asset allocation meets your plan, you should also see if there is a way you can lower your fees. Personal Capital offers a free portfolio review so you can eliminate excess fees from your 401(k).
Thoughts on Investing
I’d like to hear your take on investing . How many of you have automated your investments? What has worked well for you?