The first step to building a portfolio is the decision to invest, but choosing holdings can be overwhelming.
There are many reasons for that — people are afraid of choosing the wrong investments, worried about market crashes or deluged with too much information. Whatever the reason, not investing at all and letting funds linger in cash accounts can have its own negative consequences, such as inflation eating away at your spending power.
As common as investor paralysis is, it can be avoided. Having a plan, diversifying holdings, understanding how markets work and streamlining information are a few ways investors can build up their courage and flex their investing muscles.
Have a plan. As investing questions go, this one is usually easy to answer: Why are you investing? Is it to save for retirement, your children’s education or other goals? Setting goals and the timeline for needing the money helps investors find the right securities the first time, and remembering the reason why they’re investing helps them withstand a volatile market.
[See: 8 Ways to Buffer Your Portfolio From a Market Slide.]
Investing is not about making as much money as possible — it’s about recognizing that money is a means to an end. The more people understand their goals and objectives, the easier it is to think long term and prevent unnecessary risk-taking, says Beth Blecker, financial advisor and chief executive officer of Eastern Planning in Nanuet, New York. “They’re not going to make the most money right now,” she says. “But over time we’re going to have a portfolio that really works for them.”
Tony Roth, chief investment officer for Wilmington Trust, the wealth and investment advisory arm of M&T Bank, in Wilmington, Delaware, says investors often want to time market entry, especially if prices are higher. For example, Roth says, an investor who may have wanted to buy Amazon (ticker: AMZN) at $1,000 and now sees it at $1,400 feels he or she missed out on the gains and waits to buy it cheaper.
Instead, Roth says, use dollar-cost averaging, which is buying a little bit each month until you’re fully invested. The technique smooths out how much an investor pays for a stock over time, reducing the risk of buying in at a market high. Investing “doesn’t have to be binary where you make everything or lose everything,” he says.
On the flip side, Jeff Mills, managing director and co-chief investment strategist at PNC Asset Management Group in Philadelphia, says an investor might plan to buy more shares when prices drop, but when that happens the investor gets cold feet instead. “When that drop actually occurs, it can often feel scary, and people may not put in those buy orders when they said they would,” he says. “It is hard to change investor behavior, because that behavior is hard-wired in our DNA.”
This is where having a written plan — and committing to it — helps investors overcome paralysis, he says. “Another strategy is to put in orders at certain price targets below the market to take the emotion out of those purchases,” Mills says.
Diversify your holdings. Sticking with the status quo is another form of investor paralysis, something Blecker saw a lot in 2017, when some investors were afraid to take profits from their U.S. large-cap holdings and diversify into international holdings. “People don’t want to miss out,” she says.
Although U.S. large-cap stocks outperformed other investments the past few years, she says that’s not the point. “We want to do well for ourselves with the best risk tolerance we can do,” she says. “We live in a global world. We don’t want a portfolio with 90 percent U.S. large-cap stocks.”
This is where dollar-cost averaging comes in again, Roth says, but on the sell side. Investors who are afraid of missing out on further gains can sell just a portion of their position to take some profits but still remain somewhat invested. Meanwhile, reviewing long-term portfolio goals often serves as a reminder to rebalance a portfolio and maintain the asset allocations needed to meet your goal, he says.
[See: 7 Mistakes to Avoid With Dollar-Cost Averaging.]
Confront your market crash fears. Memories of 2008 still haunt some investors, Blecker says, which makes them afraid to move money, especially if they lost funds during the financial crisis. Blecker has had new clients come in with all-cash holdings because they were terrified of losing money in another market crash.
To help these clients get over their fear, she talks to them about the need to account for inflation and interest rates, and creates a diversified portfolio that she gradually invests them in. “We have them put in maybe only 20 percent at the beginning, and then they see what they’re doing,” she says. “Then we pull them a little bit more, and we’re constantly talking about long-term goals and risk and reward.”
Mills says investors need to put market moves in perspective, noting that pullbacks of 5 or more percent have occurred three times per year on average since 1930. Market corrections of 10 percent have happened once per year on average, and 15 percent drops once every two years. “What we experienced the past week is actually more normal than what the market did in 2017,” he says.
Because of the inherent risks of investing in stocks, people should invest in ways that make them comfortable so they can mentally and financially endure periods when the market falls. “This is also where a diversified long-term asset allocation comes into play,” he says. Having exposure to the right mix of asset classes, like stocks and bonds, will help keep you anchored in a choppy investing market.
Avoid information overload. It’s easy to get overwhelmed by financial information in an era of 24/7 market news. Financial advisors can help you tune out all the noise. Look for one who has had experience in different market conditions and understands market complexity, Roth says. Then rely on this person as a guide when the markets or the news becomes overwhelming. “Going it alone, it’s a lot easier to get sidetracked by your own emotions,” he says.
[See: 13 Ways to Take the Emotions Out of Investing.]
Mills suggests do-it-yourself investors streamline their information. “Find a few sources that you believe provide reliable, balanced and thoughtful perspectives,” he says. Be consistent, and use those sources as your primary means of information. Second, “it is the exception rather than the rule that a particular headline or article should actually lead to something actionable in your portfolio.” For long-term investors, he says, the day’s headlines just don’t matter much.
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4 Steps to Get Over Investor Paralysis originally appeared on usnews.com
