Investing always involves risk. You know this when you first invest your money in the stock market, but sometimes it doesn’t really matter until you watch your portfolio balance drop day by day. Then you want to go into damage control mode immediately. But sometimes that can do more harm than good.
The best thing you can do is often the hardest thing to do: nothing. Here’s why.
Emotional investing is usually bad investing
Some people’s reaction when they see their portfolio tank is to immediately withdraw their money to prevent things from getting worse. But that’s mostly based on the wrong assumption that things will never get better. In reality, this is mostly not the case. That S&P500 has had a compound annual growth rate of 10.7% over the past 30 years, despite huge losses in several of those years.
When you sell assets that are currently performing poorly, you often turn a short-term loss into a permanent loss. Had you left your investments alone, they might have recovered over time.
There are definitely situations where you should change your investment strategy. It can be dangerous to put all your money into a handful of stocks or a single industry. If these companies make bad decisions or the industry suffers a major setback, you could lose a lot of money. So make sure you have diversified your portfolio by investing in at least 25 different companies across different market sectors.
An index fund is a good option for most investors. They’re affordable and spread your money across many companies, so no one influences your portfolio too much. You can find these with almost every broker. They often include the name of their benchmark index in the fund name.
You may also want to reassess your risk tolerance. You don’t want to put all your money into stocks when you’re nearing retirement. The odds are too great that a bear market could wipe out a large chunk of your savings. Don’t hold more than 110% minus your age in stocks. If you’re 50, that means you’re 60% in stocks and 40% in bonds. This can help protect what you have.
You could also try a target date fund if you want even more hands off. These are bundles of investments that automatically become more conservative over time. Each fund has a target year listed in its name. However, these funds are not always the cheapest option.
How to safely ignore your investments
After you’ve reviewed your portfolio and made sure your money is appropriately diversified and your investments match your risk tolerance, try letting things run on autopilot for a while.
See if you can set up automatic contributions to the account so you don’t have to make them manually. If you have a 401(k), you should be able to do this and change your contribution amounts through an online account or by speaking to your human resources department. Many IRAs and taxable brokerage accounts allow you to link a bank account and set up an automatic transfer.
Avoid reviewing your portfolio on a daily or even weekly basis. If you don’t plan on using your money for the next five to seven years, these day-to-day fluctuations shouldn’t matter too much to you. And if you plan on using your money sooner, you probably shouldn’t invest it in the first place.
Find other things to distract yourself with and limit your portfolio checks to a few times a year. If you still find yourself losing money, try to remain objective. Think about the long-term growth potential of the investment. If you think things will go well, stay the course.