There’s a fine line between monitoring your investments and micromanaging them. Cross over that line and your preoccupation quickly becomes an obsession that can lead to poor decision-making.
“Given the inherent uncertainty about the future, investors have to make decisions without having complete information,” says Daniel Kern, chief investment officer of TFC Financial in Boston.
Instead, investors sometimes freeze like a deer caught in a car’s headlights and miss great opportunities by overthinking the market, Kern says. It’s a recipe for inertia, with the cost adding up over time from the loss of both potential gains and compounding interest.
[See: Avoid These 8 Rookie Investing Mistakes.]
Good opportunities wait for no one, and wavering on a decision to buy can backfire if stock prices rise. Trying to time the market is a losing game, says Ryan Nauman, vice president, product and market strategist at Boston-based Informa Financial Intelligence. It’s better “to move forward with your strategy to capture as much market appreciation as possible.” On the flip side, overthinking investments also can lead investors to sell too quickly.
The 2008 financial collapse is a prime example of how overthinking can fuel investor decisions, says Bill Van Sant, senior vice president and managing director at Univest Wealth Management in Souderton, Pennsylvania. Investors who brooded too much over the market’s decline moved quickly to sell, locking in those losses.
Although it sounds contradictory, overthinking can also push investors to act without thinking things through. “Investors may think it’s a smart decision to purchase a rising stock before it takes off even higher, but they may ultimately be buying at too high of a price,” Van Sant says. Rather than let their goals drive their decision-making, overthinking investors fixate on the stock price and assume it will continue to rise, when the reverse may be true.
A fresh perspective can help you can move past these mental blocks and ditch the overthinking habit.
Avoid information overload. It’s natural to want to keep up with what’s happening in the markets but don’t overdo it. With financial news never more than a smartphone away, investors may feel a false sense of urgency to act. David Aaron, chief investment officer of New York-based EMM Wealth, says this can lead investors to make decisions under duress, “seeking to put money to work at the highs, and dumping portfolios at the lows.”
If you review your investments daily because the news has you on red alert, checking their status less frequently can ease some of the pressure you may feel to act. The best way to track your portfolio’s performance is to look at quarterly trends, says Mike Falco, a financial advisor and certified public accountant at Falco Wealth Management in Berwyn, Pennsylvania. He says how investments move up or down from quarter to quarter can offer a more accurate picture of performance.
Too much information poses another danger: overconfidence. After spending months researching a stock or mutual fund, investors may begin to think they know more than they really do when in fact they may be setting themselves up for disappointment by banking on past performance to guarantee future success.
[See: 7 Ways to Tell If a Stock Is a Good Price.]
Prioritize planning. The cure for overthinking investments is having a plan, says Kimberly Foss, president and founder of Empyrion Wealth Management in Roseville, California. A well-considered approach designed to meet your goals will always produce better results, compared to “a haphazard method of buying or selling whatever looks good on that particular day,” she says.
Having a plan also can keep you from making the potentially costly mistake of chasing returns. Nauman says that when your objectives are clearly defined, you’ll know what return your portfolio needs to produce to achieve them. You can then make those target returns the focus, rather than whether stocks are moving up or down.
“It’s a given that your investments will underperform at some point, but it’s important not to panic and lock in the losses by selling,” Nauman says. If you stay focused on the larger plan, periods of high volatility may catch your attention, but they’re less likely to set you back because of a hastily made decision. In the end, Nauman says, investing for a long-term goal is a marathon, not a sprint.
Keeping your broader asset allocation in mind can help you maintain perspective. Kern says your investment portfolio should be like an orchestra or a sports team and that “all the parts should fit together and be in balance.” Although a portfolio’s individual components matter, what’s most important is the collective effort. Kern says many investors get sidetracked by what’s occurring with one individual investment, rather than considering the entire portfolio.
Be consistent. Having a plan won’t matter a jot if you abandon it at the first sign of trouble. It’s important to stick to a workable investing plan, Van Sant says, noting that “patience is key for the long-term investor.”
To remove the risk of overthinking investments, automate as much of your portfolio as possible. Aaron says automating your contributions, asset allocation and rebalancing activity in your retirement or taxable investment accounts leaves you with only the bigger investment picture to consider.
Of the three, rebalancing is most important for keeping your risk exposure in line with your risk tolerance. Rebalancing can also help make your portfolio more cost- and tax-efficient, while maximizing performance.
Chris Cook, founder and chief executive officer of Beacon Capital Management in Dayton, Ohio, says investors should actively seek consistency in their returns. Trying to anticipate every uptick or downturn only sets an investor up for being either too long or short on the trigger when the solution is a triad of diversifying investments, minimizing losses before they become destructive and leaving emotions at the door.
Reining in emotions may be the greatest challenge for someone prone to overthinking investment decisions. But viewing the market as something to be feared is a mistake. Instead, a level-headed stance can help you fight your worst fears and ward off confused thinking.
[See: 13 Ways to Take the Emotions Out of Investing.]
“Never make a move until you understand the rationale for what you’re doing,” Foss says.
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3 Ways to Stop Overthinking Investing originally appeared on usnews.com
