When you conscientiously save and contribute steadily to your 401(k) and your IRA but don’t see meaningful growth beyond your contributions, it can be a little disheartening. You may be wondering why your portfolio isn’t growing.
And, more importantly, how can you get your investments back on track?
While you may think you’re doing everything right, if you’re facing a zero-growth portfolio, chances are your brain is killing your returns. While you may logically know what to do, your emotions may get in the way. You may not even realize that you’re making decisions with your heart rather than your brain.
Whether the market is going up or down, it’s the decisions we make with our portfolios that ultimately cost us the most. When you’re facing investments that aren’t growing, it’s time to ask some hard questions.
It’s important to review your investments regularly and benchmark them against market performance. This is how you know if what you’re doing is working or if you need to adjust your strategy.
Take a look at some of the common reasons why your investments may not be growing.
Not Having an Investment Plan
There’s an old saying, ‘If you fail to plan, you plan to fail.’ This is never truer than when it comes to your investment returns. Many people don’t realize how important it is to plan for your money and invest it properly. Without a plan, you’re just throwing darts in the dark, hoping to hit a bullseye.
When you sit down to make an investment outline, it’s important to consider your investment horizon and your drawdown strategy. This will help inform how conservatively or aggressively you invest and how you rebalance your portfolio. It also means taking stock of all your assets and determining what role they’ll play in the future.
This can seem overwhelming at first, but talking with a financial planner can help you formulate a strategy that will ensure your long-term success. At the same time, it’s unnecessary to work with a professional; having someone in your corner who has the knowledge and skills to help you balance income and investments can give you peace of mind.
If you have a significant other, make sure to involve them in all investment and portfolio planning. This will ensure that you’re both on the same page and eliminate any bad surprises down the road. It also makes investing a team effort and means you’ll have someone else to lean on when facing tough financial decisions.
Once you have a plan in place, make sure to follow it. Try not to get distracted by the newest or hottest investment – trust me; I know it’s easier said than done.
However, if you truly believe the investment is something you’d like to pursue (after due diligence), you can set a small amount of your portfolio aside for this investment. A qualified advisor familiar with your financial situation can help you build this into your portfolio strategy.
Listening to the Noise
If you turn on the TV or open a newspaper, you’ll inevitably be bombarded with news about where the market is going. Some days, it’s soaring up, and headlines are blaring about how the bull market is great for investors. Other days, financial experts are predicting doomsday scenarios as the market takes a sudden dip.
Please don’t listen to all the noise; it’ll drive you crazy. The day-to-day market fluctuations don’t have much to do with long-term investing strategy. Listening to all of the experts will only make you paranoid and cause you to make rash decisions. In fact, studies show that experts are rarely right, but this doesn’t prevent media outlets from consulting them every time the market goes up or down.
Ignoring the market’s roller-coaster ride is easier when you have an investment plan. Following the rules you had outlined within, it will give you the confidence to stay the course. The best thing you can do for your sanity and wallet is to ignore the noise and experts trying to predict where the markets will go next.
Even if you like to stay informed about market fluctuations, make a rule to wait before acting on any hot tips or investment information you get from media outlets. Keep in mind that your individual investing situation is not the same as everyone else’s – you have different goals, income, and priorities than other people. Don’t let all the noise distract you from your long-term plans for your portfolio.
Trying to Time the Market
Investing in a bull market can make you think you can time your investments to take advantage of the current rising stocks. However, we often forget to consider the cognitive biases that can lead us to believe we can time the market and come out ahead.
For example, the confirmation bias can lead you to ignore any negative news and seek only information supporting your position. If you believe the market will continue to rise, you’ll only lean on sources that confirm your current belief. This bias is the primary driver of the psychological investing cycle and can cause you to make poorly informed decisions.
As individuals, we want confirmation that our current thoughts and processes are correct. We hate being told that we’re wrong, so we seek out sources that tell us we’re right. This is why it’s important to consider both sides of every situation and analyze all relevant data. Being right and making money are not mutually exclusive.
Trying to time the market rarely works out the way you plan. And, if it does, it’s actually more dangerous in the long run because it makes you think you can repeat this performance again and again. It also makes it less likely that you’ll heed warning signs in the future and conserve your capital. After all, you timed the market right before, so what’s different now?
This type of thinking will result in subpar investment returns over the long run. Even mutual fund managers who do this for a living are wrong 99.4 percent of the time. Keep that in mind next time you try to time the market.
Paying large and Unnecessary Fees
Nothing will limit your portfolio gains faster than paying large and unnecessary fees. It may seem like a simple idea, but many people completely ignore the fees they pay. In many cases, you may be paying triple the fees every time you buy mutual fund shares.
Over time, these management fees will eat into your earnings and have an impact on your portfolio’s long-term growth potential. It’s like paying $9 for a $3 gallon of gas. If your gas bill was tripled from now until retirement, don’t you think that would have an impact on your budget? What makes this even worse is that the fees are recurring.
In fact, the average investor throws away roughly 20 percent of their initial portfolio value over a ten-year period by paying mutual fund managers excessive fees. If you have mutual funds in your portfolio designed to perform against an index, replace them with Exchange Traded Funds (ETFs) or index funds. You can get the same growth without paying a manager.
Playing it Too Safe
When you invest your money in the market, there’s always a risk involved. While it may be disheartening to see the value of your portfolio decline during a market correction, it’s even worse to put your money in investments that don’t even match the pace of inflation. The market drop will deliver immediate pain but playing it too safe will stagnate growth over time.
Markets go up and down – a bear market follows every bull market. However, we often ignore the insidious effect of inflation on our investments and opt for the safe play. The current inflation rate is hovering around 2 percent, which means any investments that return less than losing money.
This is why it’s important to have an investment plan that matches your goals with your risk tolerance. While it’s ok to have some of your investments in safer options, such as bonds and CDs, they need to be balanced out with some higher-earning options. If you have a long-term plan in place that considers all of your assets and outlines a withdrawal strategy, it’s easier to take some investment risk.
Speak to a financial advisor who can help you make a plan that creates a good balance between risk and investment return. Taking the safe route may seem like the best option when the markets are going up and down, but it can lead to stagnant portfolio growth.
Taking a short-term view
You may be gambling with your portfolio without even realizing it. The gambler’s fallacy plays into our tendency to be driven by emotion – it makes you put more weight on previous events believing that future outcomes will somehow be the same. In fact, every piece of financial literature addresses this bias: Past performance is no guarantee of future results.
Yet, we continue to make short-term decisions based on long-term performance to the detriment of our portfolio. A well-balanced portfolio with a long-term focus can help offset the ups and downs of the market.
Taking the short-term view will do the opposite. When picking investments, don’t focus just on the possibility of an investment growing in value and the probability (i.e., how likely is it).
While something may be a good deal in the short term, we tend to neglect the statistical measure of risk undertaken with any given investment. We tend to focus on stocks that have already shown big increases in price as it is possible they could grow even more.
However, the probability is that the corrective action will occur soon, and most of the gains have already occurred. This is how many investors end up buying high and selling low to the detriment of their portfolio.
Not Reviewing Your Investments Regularly
If you want your investments to grow, you need to dedicate some time to review them regularly. A quarterly check-in will help you keep tabs on how your portfolio is growing against current market conditions. You should also schedule an annual overview to do a more in-depth review of your investment plan.
While having an investment plan is important, reviewing it regularly is imperative if you want to meet your investment goals. Plans should evolve and grow right along with your own long-term goals. That’s why it’s important to have a financial blueprint and use it to make informed decisions about the portfolio's future.
Don’t let the relativity trap cause you to miss out on higher returns. This is our tendency to compare our current situation within the scope of our own limited experience. For example, if you sold your home for more than you bought it, you may assume that your next home purchase will have a similar result. You’re mentally anchored to that event and base your future decisions around minimal data.
This can happen with stocks – if you buy an individual stock and it goes up in value, you remember that event, and it becomes your anchor. You remember that stock as opposed to one where it lost value. In the latter case, you may attribute that to buying and selling at the wrong time rather than investor error. Reviewing your investments regularly can help you spot these patterns and take a step back.
We are all human, and we all make mistakes. Despite our best intentions, it’s almost impossible to avoid cognitive biases and to make poor investment decisions over time. That’s why it’s important to have a plan in place so you can better handle the ups and downs of the market.
Take a step back and evaluate your current portfolio strategy. Are you getting the results that you want? Do you have a plan in place for the inevitable market correction? Being disciplined about your investment decisions can help reduce the impact of human emotions and increase your investment returns over time.
This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at his website NextGen Wealth.