What’s the most important factor affecting the performance of your investments?
Your mind might jump to the ups and downs of the market, and they do have an effect. When share prices rise, so too will the value of your portfolio. However, the markets aren’t the starting point of a successful investment: your mindset is.
Your approach to investing could influence your success.
Short-term market movements don’t always reflect long-term trends
Tracking the markets can be enticing. They are constantly moving, with numerous factors influencing them. Headlines can make even slight adjustments seem dramatic.
It can seem logical to focus on these movements, but doing so overlooks the long-term perspective that benefits most investors. When you look at the market returns over decades, you’ll see that the ups and downs smooth out.
Instead, you're left with a general upward trend. Even when markets have fallen sharply, such as during the Covid-19 pandemic, they have, historically, recovered these losses over a long-term time frame.
Investors who focus on short-term market movements can find it more tempting to make adjustments to their portfolio as they try to time the market (buy low, sell high). As movements are impossible to consistently predict, they’re likely to make mistakes and could miss out on long-term gains as a result.
So, if you shouldn’t be keeping an eagle eye on market movements, how should you approach investing?
Calmness and patience are often essential for long-term investors
An important first step to take is to define why you’re investing. Your reason might affect your investment time frame and the level of risk that’s appropriate for you.
Then, you can create an investment portfolio that reflects your goals, risk profile, and financial circumstances. Your financial planner will help assess what’s right for you.
Next, far from keeping an eye on the markets section of the newspaper, it’s time to be patient. Trusting your investment strategy and taking a long-term approach could lead to better outcomes and stronger returns.
It sounds simple, but embracing this mindset can be more difficult than you expect – it’s so easy to reach for your phone and check your portfolio’s performance or the news. While that might seem harmless, it can trigger an emotional response, from fear to excitement. These emotions mean you’re more tempted to change your investments and potentially miss out on long-term gains.
If you struggle to focus on the bigger picture when investing, you might benefit from:
- Reducing media exposure
- Setting clear dates when you’ll look at the performance of your portfolio
- Going back to your initial investment goal when you’re making a decision
- Working with your financial planner who can highlight when short-term market movements might be affecting your emotions.
These simple steps could help you develop some of the most important skills for successful investing: patience, discipline, and emotional control. Adopting a mindset that embraces these attributes could have a greater impact on your returns than short-term market movements.
Taking a long-term approach doesn’t mean you never look at your investment portfolio. Regular reviews are still important. However, look at the performance over years, rather than days or weeks.
Similarly, there might be times when it’s appropriate to make adjustments to your portfolio due to changes in your circumstances or long-term trends, not because of the latest headline.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
