Few pieces of investment advice are more time-tested or persistent than the idea of ignoring your investments in order to see growth over the long haul.
It sounds completely insane on the surface.
However, paying less attention to your investment holdings may actually be the number one trick successful investors have used to build their fortunes over the years.
Here’s what you need to know about the case for ignoring your investments. We’ll also explain why it can help you build your wealth more effectively.
When Is Ignoring Your Investments a Good Idea?
Interestingly, ignoring your investments really is a good strategy for long-term wealth accumulation under most circumstances.
Being too active with your investments can lead to emotionally-driven buying and selling decisions.
It’s altogether human to let fear or greed get the better of you.
However, both of these impulses can and most likely will take a toll on your portfolio.
Investors acting on momentary emotion rather than a long-term investment plan are more likely to underestimate risk or move their capital into assets that will produce lower growth.
Believe us, no matter how strong your gut instincts are, they’re no match for a sound investment plan.
Ideally, one that’s put together when you’re calm and thinking logically.
Ignoring the day-to-day movements of your stocks is also a sound idea because ordinary price fluctuations represent largely useless data.
You should, of course, track the performance of your stocks over the long term.
But, you’ll get nothing useful out of checking the prices every day (or several times per day. You know who you are).
Checking stock prices a bit less often will not only cut out some of the noise in your investment analyses but also help you avoid becoming anxious as a result of volatility.
Market anxiety is a well-documented phenomenon among investors. It’s one that can lead to rash, emotional decision making very quickly if not kept in check.
It’s also usually a good idea to stay the course on putting money into your portfolio.
Many investors claim to be able to time the market.
However, the truth is that no one can pick the right entry point for a stock or fund every time.
Once you’ve put together a plan for investing your money, it’s usually best to stick to that plan and avoid reacting to day-to-day stock price changes.
By sticking to a long-term investment strategy, you can set yourself up for future growth without falling into the trap of trying to time the market.
But What About Market Crashes?!
If you’re a nervous investor to start with, major market downturns can be especially harrowing.
With that said, the absolute worst time to start selling out of fear is when your stocks are losing value rapidly.
Selling as the market crashes absolutely guarantees heavy losses.
In fact, since bull markets are on average five times longer than bear markets and produce about 4.5 times larger gains than the losses associated with the average bear, there’s a very strong possibility that you’re giving up large future profits because of momentary fear of losses.
Remember, when you sell into a down market, you’re usually only helping the person who’s buying your stocks.
Conversely, there’s a lot of truth in the old axiom that you make most of your money when the market is down.
Keep up with your long-term strategy and continue buying in a bear market as you would in a bull.
This way, you’ll likely see disproportionate gains when the market begins to rebound.
This is especially true if you pursue a dividend reinvestment strategy since the yields on solid stocks purchased during a down market can be quite high and can help you build your portfolio as time goes on.
To see the power of ignoring crashing markets, let’s consider the aftermath of the 2008 financial crisis.
An investment of $10,000 in a composite of the S&P500 index made at the bottom of that bear market would have been worth over $42,5000 by October of 2018.
Investors who continued to buy shares of reliable companies in accordance with their existing strategies during that crisis made out extremely well over the long haul.
Those who sold ultimately left substantial gains on the table.
When Shouldn’t You Ignore Your Investments?
With all of this said, you obviously shouldn’t ignore your investments at all times.
If a stock you own has become less attractive because its fundamentals have changed or because the industry the company operates in is shrinking due to persistent market forces, holding onto it may no longer be the smart choice.
You also have to be cautious not to ignore an underperforming asset for egotistical reasons.
While we all hate admitting when we’re wrong about a stock. There comes a point at which you should own your mistake. That is, take the loss, and move on to greener pastures.
Every investor makes bad trades. The key to mitigating losses is to be able to sell a bad asset as dispassionately as you hold a good one.
You may also need to be a bit more active with your investments as you get closer to retirement.
At that point, your focus will likely shift from building new wealth to preserving what you’ve already accumulated.
Many of your stocks will likely still have a place in your near-retirement portfolio. However, others may need to be sold as you adjust your holdings.
If you go about it logically, retooling your portfolio to better reflect your needs is a perfectly valid investment decision.
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