When investing your money, most people’s primary goal is to grow their investments over time. However, they become discouraged when their assets are not doing as well as they hoped. Is it the stock market? Have I invested the wrong way? Did I get in at a bad time?
When it comes to investing, hindsight is 20/20. It is extremely difficult, if not impossible, to predict the right time to enter the market. The best way to start investing is to get your money invested for as long as possible.
So, you’ve invested in the market but are not getting the returns you want. Now what?
Before jumping to the conclusion that you may have invested the wrong way, consider a few things.
If your Advisor has recommended the portfolio for you, then it is unlikely that the cause of low returns for you is a mismatched portfolio allocation. Sure, it happens, but many other reasons can cause poor returns (other than a poor year in the market).
Here we will discuss some of the most significant explanations for lower-than-expected portfolio returns.
1. Pausing Contributions
Dollar-cost Averaging is a term you may have heard of when it comes to investing. It is an investment approach where money is invested into the market regularly and consistently. This way, you hit the market at all different points: high, low, and everywhere in between. The goal of Dollar-cost Averaging aims to reduce the possibility that you are only buying at moments of high prices in the stock market.
Another benefit of consistent contributions is that this helps your money grow and adds more to your portfolio. If you’ve set up a Pre-Authorized Contribution, you can invest on Autopilot without thinking about the investments.
One of the primary mistakes people make is pausing or stopping contributions to their accounts when the market is down. When contributions are halted, your money will not be able to grow as fast with fewer funds. In addition, when prices are low, this is the best time to put money into the market. Think of it like buying something on sale, at a discounted price.
When stopping your contributions, future returns on the portfolio will be affected.
2. Pulling money out of the Stock Market
Similar to pausing contributions, pulling money out of the portfolio due to fear can have an adverse effect on your returns. Taking money out can not only realize capital losses, but now less money is working for you in the stock market.
When the market is down, it is best to wait it out. If you do not need the funds in the short term, leaving them invested will help your portfolio return. Historically, the stock market tends to recover from these dips in a few years.
Taking funds out when prices are low, and re-contributing when prices are high again, can lower your portfolio returns.
3. Not Rebalancing
The last main point regarding why returns may be lower than expected is not rebalancing your portfolio.
When investing, you and your Financial Advisor will find a balance of stocks and bonds that is right for you based on many factors, including your tolerance to risk. When the percentage of stocks and bonds in your portfolio does not match your chosen asset allocation, rebalancing helps to put you back on target.
Rebalancing helps to sell high and buy low, one of the best strategies for investing. If you are not rebalancing your portfolio, you may be off your target asset mix and not taking advantage of this fundamental investment strategy.
Rebalancing is an integral part of investing. Refraining from rebalancing your portfolio may hurt your returns.
How does all this information help?
Understanding why your portfolio may be underperforming can help you make the best decisions for your portfolio to ensure the highest possible returns for your asset allocation. Although the stock market can be volatile, with many ups and downs, following the proper investment techniques can help you invest better, which may lead to better returns for you in the future.
