A good way to think about investments is like soap, the more you touch them the more they waste away. The principle is if you meddle, try to time the market, or catch onto the next trend without being saving professional well then you’re far more likely actually get fewer returns.
The Behaviour Gap
Carl Richards is the author of ‘the behaviour gap’. In his book, he explains the term and its effects. The behaviour gap is the difference between the rates of return that investments produce when an investor makes rational decisions and the rates of return investors actually earn when they make choices based on emotions. The phenomenon is tied to our natural desire to avoid pain and seek pleasure, which leads us to act irrationally.
Generally in accordance with this theory investment return is traditionally better than the investor return because our behaviour, meddling in the market, and meddling with our investment can end up costing us enormous amounts of money. Obviously, that isn’t what you want from your investments. The principle is if you’ve invested with a particular time horizon involved, stick to it. For example, if you are investing for your pension and you are planning to start drawing on that at age 65 or 70 it shouldn’t matter what is happening in the market day to day if you are only in your 40s.
3 Tips for Long-Term Investing
Get Your Finances in Order
Before you can invest for the long term, you need to know how much money you have to invest. That means getting your finances in order. Start by taking stock of your assets and debts, calculating your emergency fund and making a financial plan.
Tackling these financial tasks first ensures that you’ll be able to put funds into long-term investments and not need to pull money out again for a while.
Know Your Time Horizon
Everyone has different investing goals: retirement, paying for your children’s college education or building up a down payment on a home.
No matter what the goal, the key to all long-term investing is understanding your time horizon, ie how many years before you need the money.
By understanding when you need the funds you’re investing, you will have a better sense of appropriate investments to choose and how much risk you should take on.
Review Your Strategy Regularly
Even though you’ve committed to sticking with your investing strategy, you still need to check in periodically and make adjustments. Our team here at Rockwell can help you do an in-depth review of your portfolio on a quarterly basis to keep on top of any changes. Not only should you review your investments, but also your financial position, it could be the case you have more discretionary income that could be invested.
For more investment advice, chat with one of our investment advisors. Get in touch with us today to make smart investment decisions.
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