Why neglecting your investments can be good for your finances right now

Investing always involves risk. You know this when you first put your money into the stock market, but sometimes it doesn’t really hit until you see your portfolio balance dwindle day after day. You then immediately want to launch into damage control mode. But sometimes it can do more harm than good.

Often the best you can do is also the hardest: absolutely nothing. That’s why.

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Emotional investing is usually bad investing

Some people’s reaction when they see their portfolio is to immediately withdraw their money to stop things from getting worse. But this is usually based on the false assumption that things will never get better. In reality, this is usually not the case. The S&P 500 has had an overall average annual growth rate of 10.7% over the past 30 years, and this is despite huge losses in several of those years.

When you sell off investments that are currently doing poorly, what you are often doing is turning what would be a short-term loss into a permanent one. If you left your investments alone, they may have recovered in time.

There are definitely situations where you need to make some changes to your investment strategy. Putting all your money into a handful of stocks or one industry can be dangerous. If these companies make some bad decisions or the industry faces a major setback, you can lose a lot of money. So make sure you diversify your portfolio by investing in at least 25 different companies in different market sectors.

An index fund is a great option for most investors. They are affordable and spread your money among many companies so that none affects your portfolio too much. You can find them at almost any broker. They often include the name of their benchmark index in the fund name.

You may also want to reassess your risk tolerance. You don’t want all your money in stocks if you’re on the verge of retirement. There is a very high probability that a bear market will wipe out a huge chunk of your savings. Don’t hold more than 110% minus your age in stocks. If you’re 50, that means holding 60% in stocks and 40% in bonds. This can help you protect what you have.

You can also try a target date fund if you want to be even more liberal. These are investment packages that automatically become more conservative over time. Each fund has a target year listed in its name. However, these funds are not always the most affordable option.

How to safely ignore your investments

After reviewing your portfolio and making sure your money is appropriately diversified and that your investments meet your risk tolerance, try letting things run on autopilot for a while.

See if you can set up automatic contributions to the account so you don’t have to make them manually. If you have a 401(k), you should be able to do this and change your contribution amounts through an online account or by talking to your human resources department. Many IRAs and taxable brokerage accounts will allow you to link a bank account and set up an automatic transfer.

Avoid checking your portfolio every day or even every week. If you don’t plan on using your money for the next five to seven years, these day-to-day fluctuations shouldn’t matter as much to you. And if you plan to use your money early, it probably shouldn’t be invested in the first place.

Find other things to distract yourself and limit your portfolio reviews to a few times a year. If you do find yourself losing money, try to remain objective. Consider the long-term growth potential of the investment. If you believe it will do well, stay the course.

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