How to Avoid Self-Sabotaging Your Investments

How to Avoid Self-Sabotaging Your Investments


There’s an anecdotal story out there that says Fidelity conducted an internal study to evaluate who their best-performing account holders were. Any guesses as to who did the best in the markets?

It wasn’t necessarily people who were already wealthy. It wasn’t people who tinkered with their accounts to try and optimize their portfolios. And it certainly wasn’t people who closely watched the markets and tried to stay one step ahead of what stock prices would do next.

Fidelity found that the investors with the best performance had forgotten they had an account with Fidelity.

Why the Average Investor Is So Bad at Investing

Whether this story is true or not is debatable. The New York Times reports that a spokesperson from Fidelity said the company never performed such a study.

Regardless, in a way, it is true even if Fidelity didn’t literally call up forgetful account holders. The average investor, part of the middle class, raising a family, and just trying to grow their wealth, is a notoriously bad investor. Regular people tend to earn below-average returns.  

This is largely because people try to predict what the market is going to do next or get spooked by sensationalized media headlines. And some are just downright superstitious, making financial decisions not off facts but off feelings.

Essentially, all of this causes people sell when the market is low because they get nervous or scared. Then they buy when the market is high because they feel confident. This is the opposite of how to invest in the ideal way: buy low and sell high.

That’s why the idea behind the Fidelity story is still valuable, even if the events in the story didn’t actually happen. Investors who simply leave their accounts alone and don’t try to actively invest do better over the long-term than investors who fiddle. It’s a good parable for anyone who wants to learn to avoid self-sabotage with their wealth.

Here’s more about what you need to know to avoid sabotaging your investments so you can successfully grow your wealth.

Avoid Emotional Decision-Making Around Your Investments

Most people get emotional in one way or another when the stock market gets volatile. But market volatility isn’t a bad thing. It’s just a way to measure the uncertainty about the size of a potential change in a security’s value (meaning, the price of something like a stock or a bond).

People get overconfident and excited when volatility happens in such a way that the market goes up. The higher it goes, the more people clamor to get in and buy stocks.

But then those same people get scared when volatility happens in the other directions and the prices of assets and securities plunge. They panic and start selling.

This is why Warren Buffett famously said to “be fearful when others are greedy and greedy when others are fearful.” In practical terms, this means buy when other people are selling and sell when others are buying.

We know markets are volatile. We know they go up and down. But we also know that over the long term, the markets trend upward and provide a return. So if we focus on long-term investing, we’re more likely to avoid emotional mistakes and enjoy reasonable gains.

This is why having a financial plan in place is critical to financial success. With a plan, you don’t have something objective and reasonable to guide you — even when you feel like panicking because the market experiences volatility.

Tune Out the Talking Heads

You can find countless examples of when even a single reporter or news anchor predicted a market collapse that never happened. Writers and journalists are constantly talking about the next big downturn.

And if they’re wrong, there’s no accountability. People still tune in, listen up, and consume what these talking heads have to say even if they’ve been wrong in their predictions about the market over and over again.

Media personalities aren’t objective and they certainly don’t give you advice in your best interest. Their goal is to get more views, clicks, and likes — so they benefit by providing sensationalized coverage of economic and market events.

Just like having a financial plan can help you stay the course when your emotions come up, having a financial planner working in your best interest can make the difference between a big mistake and financial success.

Your advisor can help you sort through the noise and understand what the best course of action is for your specific situation. So tune out the talking heads — and even your co-workers who chat about what stocks are hot or when to sell — and rely on an advisor working as your fiduciary to understand what action to take next.

You Can’t Time the Market!

There are things you can know with a high degree of certainty when it comes to investing:

  • 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.

And there are things no one can reasonably predict or know — like when the market will rise or fall. No one knows when the next bear market will start. When it does, no one will know when it will recover and start trending up again.

All we know is that these things will happen at some point. Which means that timing the market is pointless — and can lead to serious losses.

What you can do instead when getting started with investments is something called dollar-cost averaging. Dollar-cost averaging is an investment strategy that has you buy an asset on a regular schedule, regardless of its price (or what the larger market is doing).

Contributing $400 to your Roth IRA on the 15th of every month is an example of dollar-cost averaging. The idea is that you’ll buy into the market when it’s high and when it’s low, but the average will work out in your favor since the market tends to go up over time.

How to Keep Your Investments on Track

Knowing what not to do can help you when you’re learning how to invest. But the most powerful thing you can do to help make sure you stay the course is to bring in an objective third-party who doesn’t receive commissions for investment advice.

The right advisor can guide you along your path to growing wealth, helping to make rational decisions while avoiding emotional ones. They can also help you stay the course when things get scary in the markets, and remind you that investing is a long-term game.

For more information on how to keep your investments on track, schedule a free consultation with FamilyVest today!

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