News headlines and gyrating markets can tempt even the most disciplined investor to start tinkering with their portfolio.
A plunging market can instill panic: What looked like a great investment last week suddenly can leave you wondering if the good times are done. And a quickly rising market can lead to a fear of missing out.
Research shows, though, that you should resist frequent trading. The more trading an investor does, the lower their returns. A study from the University of British Columbia confirmed this, and also showed that active investors experience a lot more volatility than investors who take a buy-and-hold approach.
If you are a do-it-yourself investor, you are especially vulnerable to unnecessary trading. With easy access to your accounts, the temptation to tinker with your portfolio can be strong.
People who work with a financial adviser have a natural barrier since they need to get in touch with them when they want to buy or sell something. The adviser can head off impulsive trading by getting the client to stop and consider what they are doing.
Without that human advice, a DIY investor needs a strategy for reducing the temptation to dabble. Having a plan, distancing yourself from your investments, and putting barriers in the way of trading will help. Here are some ways to do this.
1. Put a plan in writing by creating an Investment Policy Statement, or an IPS. An IPS outlines how you will manage your portfolio. It includes a description of your investment objectives, your chosen asset allocation, and what kind of products you will own.
It should also list the conditions under which you will alter your plan, usually a big life event that changes your investment objectives. Note: Market conditions are never the reason.
When you feel the itch to log in and recalibrate your holdings, pull up your IPS. Remind yourself that your portfolio is set up properly to meet your goals and objectives.
2. Get your investments off your mind. Once you’ve done the initial work of setting it up, you can forget about your portfolio for a while. Stop checking your accounts so often, turn off notifications from your online brokerage or stock market app, and set a specific day and time each week (or even better, each month) when you will check on your investments.
3. If the stock market headlines are stressing you out, stop reading them. Let the market do its thing – you don’t need to be on that rollercoaster ride. Checking the market less frequently will be less stressful and you won’t feel compelled to try to time it through buying and selling.
4. Create some barriers between you and the trading button. It’s hard to create real obstacles, but there are a few tactics you can adopt. Delete the trading app from your phone; even that small step of having to log on to the website can give you a moment’s pause.
5. Create a rule for yourself that anytime you enter a trade, you will walk away. Take a 15-minute timeout – a walk around the block can distract you enough that you’ll abandon the trade that doesn’t fit into your plan.
6. Another idea is to own all-in-one exchange-traded funds (ETFs) instead of individual ETFs or stocks. An all-in-one ETF is a fund made up of other funds according to a set asset allocation to stocks and bonds, and to countries and regions. These products take investment decisions out of your hands – you can’t just sell your bond exposure and buy U.S. stocks.
The best investment plan takes a long-term buy-and-hold approach with very little trading. A diversified portfolio of exchange-traded funds or index mutual funds that is set up with a proper allocation to stocks and bonds and with good geographic diversification will do well for you – especially if you can keep yourself from tinkering.
Anita Bruinsma is a Toronto-based certified financial planner. You can find her at Clarity Personal Finance.
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