There’s an anecdotal story about Fidelity evaluating their best-performing account holders. Who did the best? Not wealthy people, not active traders, not those trying to outguess the market. The best performers were supposedly those who forgot they had an account.
Whether this story is literally true is debatable. The New York Times reports a Fidelity spokesperson denied the study ever happened. But the principle holds: investors who leave their accounts alone tend to outperform those who constantly tinker.
The average investor is notoriously bad at investing. Regular people tend to earn below-average returns because they predict market moves, panic at headlines, or make emotional decisions. They sell low when scared and buy high when confident, which is the opposite of sound investing.
Investors who stay invested without trying to actively manage do better over time than those who fiddle. Here’s what you need to know to avoid sabotaging your wealth.
Avoid Emotional Decision-Making Around Your Investments
Most people get emotional when the stock market becomes volatile. Market volatility measures uncertainty about a security’s price change—it’s not inherently bad. Understanding how behavioral investing impacts your goals helps you recognize emotional triggers before they derail your strategy.
People grow overconfident when markets rise and panic when prices fall. Warren Buffett famously said to “be fearful when others are greedy and greedy when others are fearful”—in other words, buy when others sell and sell when others buy.
Markets are volatile and cyclical, but over the long term they trend upward. Focusing on long-term investing reduces emotional mistakes and increases reasonable gains. A financial plan provides objective guidance, especially when volatility tempts you to panic.
Tune Out the Talking Heads
Reporters and journalists constantly predict market collapses that never happen. Media personalities aren’t objective and don’t advise in your best interest—they benefit from sensationalized coverage and attention-grabbing headlines.
A financial planner working in your best interest can help you cut through the noise and understand the right course of action for your situation. Trust a fiduciary advisor to guide you, not media personalities or coworkers discussing hot stocks.
You Can’t Time the Market
Certain truths about investing are clear:
- Markets are volatile. They rise and fall.
- All investments come with risk.
- Investing for shorter periods of time is riskier than investing for the long-term.
Things no one can reasonably predict: when the market will rise or fall. No one knows when a bear market starts or when recovery begins. All we know is these cycles happen. Timing the market is pointless and leads to serious losses.
Instead, use dollar-cost averaging—an investment strategy where you buy an asset on a regular schedule regardless of price. Contributing $400 to your Roth IRA on the 15th of every month is dollar-cost averaging. You’ll buy when markets are high and low, but the average works in your favor since markets tend to rise over time.
How to Keep Your Investments on Track
Knowing what not to do helps, but the most powerful step is bringing in an objective third-party advisor who doesn’t receive commissions on investment advice. The right advisor guides you toward growing wealth, helps you make rational decisions, and keeps you on course when market swings get scary.
Learn about protecting your nest egg from inflation and other long-term strategies that compound over time. Our investment management services are built around the wise investment principles that keep you aligned with your goals.
