One Way Investors Are Sabotaging Their Own Portfolios
Updated: Jun 20, 2022
I was recently listening to a podcast hosted by a fellow financial advisor with north of $22 billion in assets under management. He mentioned that a study done by Charles Schwab indicated that self-directed 401(k) participants (i.e. those that decide what trades to make in their retirement accounts) making about 2.6 trades per month in addition to their normal contributions. This equates to buying and selling about once every 8-10 days since the market is generally only open Monday through Friday. What are these people doing? Why are they doing it? Dollars in 401(k) accounts are *retirement* dollars, which need to be differentiated from *speculative* dollars. Do they really think that they can get in while prices are "good" and get out when prices are "bad"? How do they know when that is? Do they really think this is an effective strategy? I think not.
So what is really going on here? For some reason, people think that frequent trading is the way to be a successful investor. I can't begin to count the number of times I've heard the media say something like, "Here's how to adjust your portfolio based on today's market movement" or "This is a long term investment, I'll probably hold it for at least a month". When investors hear that type of sentence, they think that they also need to hold investments in their *retirement* portfolios for a month or less. Many times, they'll make this decision when their retirement is decades away. That clearly makes no logical sense. Are you really going to change your long-term investment strategy based on what happened yesterday in the market? Generally not. Sure, there are important factors in investment management like portfolio re-balancing and diversification, but if your long-term goals haven't changed, then why would your long-term investment strategy change?
The best analogy here is to a farmer planting seeds or crops. They plant the seeds in the ground and then they wait. They don't come back a week later and dig up the seeds to "see how they're doing". They walk away for months at a time. If the flood is going to come, the flood is going to come. If the drought is going to come, the drought is going to come. If all the farmer does is dig up the seed to see how it's doing, then they're going to kill the crops for sure! Far too often when people see the market moving up or down, they think (and are often told by the media) that they have to hurry up and do something. If it's falling, they think they have to get out. If it's rising, they think they have to get in. Neither is true! In fact, it's the opposite. The most important thing is to make sure you've established a long term strategy for your retirement dollars. Ask yourself, why are you investing the way you're investing? If you're not sure what your strategy is, then talk to a fiduciary financial planner and get some help. Volatility in the market is not a reason to change your long-term strategy. Merely the fact that an investment is falling is not a reason to sell it. Similarly, the fact that an investment is rising is also not a reason to get into it. Instead, stick with your long-term strategy.
A final analogy I'll make here is that in some cases one's largest asset is their home. Yet, generally people only check the value of their home when they go to sell it or borrow against it. Imagine if people bought and sold their homes whenever the price were to rise or fall? Sounds insane, doesn't it? The key takeaway is to develop and/or refine your long-term strategy and stick with it. Don't sabotage your long-term success by excessively trading dollars that are earmarked for retirement.
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