Be Involved in Your Retirement, Just Not Too Involved
It is good to be involved in your retirement planning but sometimes too much involvement can cost you money or your peace of mind.
Good involvement means you have put together a plan that you will follow, you understand what you are investing in, you have taken advantage of tax-advantaged retirement accounts, you check your accounts every few months, and you look for ways to invest more dollars for your retirement.
Signs of being too involved include checking on your accounts daily (sometimes multiple times), buying and selling within your accounts to try to time the market, and buying investments based on what’s hot or what your investing friend talks up.
If you are an active stock trader, you need to check your account often. But for most people, checking on your accounts daily does more harm than good. This will often keep you second-guessing yourself, send your blood pressure ski high, make you more hyper-sensitive to short-term movements of the market, and cause you to make changes that are counter to your long-term plan.
Research backs this up. Since 1984, independent investment research firm Dalbar Inc. has published its annual Quantitative Analysis of Investor Behavior report, or QAIB. If you've been following Dalbar's research over the years, one consistent theme keeps cropping up: that people are often their own worst enemies when it comes to investing.
Often using short-term strategies such as market timing or performance chasing, many investors show a lack of knowledge and/or ability to exercise the necessary discipline to capture the benefits markets can provide over long horizons. In short, they too frequently wind up lowering their longer-term returns.
The 2021 QAIB reaffirms past research finding that fund investors who remained patient and didn't focus on short-term market gyrations were significantly more successful than those who let their emotions override a longer-term strategy to build wealth. It looks at 20 years of data (1/1/2001 - 12/31/2020) and compares the returns of the average equity investor(5.96%) to the S&P 500 Index(7.43%) and a Global Investor Index(8.29%).
Over this time frame, the average equity investor would have grown a $100,000 investment into $318,302, while the S&P would have grown to $419,818 and the Global Equity Index grew to $491,818. Why the difference? Investor behavior often results in buying high and selling low. It costs people real money. It’s usually best to let time and the markets work for you and keep your daily involvement to a minimum.
Enjoy the journey!