Finke, dean and chief academic officer at The American College of Financial Services and a Certified Financial Planner™ professional, shared his insights and research during a presentation to about 20 Vanguard investment professionals. But everyday investors could also benefit from Finke’s guidance and methods.
“If you ask me how the Dow is doing today, I’d have no idea because it’s something I don’t check,” Finke said. “I’m a professor of financial planning, and I never really look up what the stock market is doing on any given day.”
As he explained, it’s perfectly logical to want to pay attention to developments in the financial markets. But you may be doing more harm to your portfolio than good if you make investment changes based strictly on what you read or hear. Emotions often run high when the markets are way down or way up and, therefore, can cloud your judgment. So what should you do?
Remove emotions from the equation
There is a way, Finke said, to change your behavioral approach.
“Stop being influenced by stimuli that affect your emotions when it comes to the markets,” he said. “Don’t check your balances frequently; take the stock market app off your phone.”
Finke agrees with Vanguard’s approach: Choose an asset allocation that fits your investment objective and then rebalance as needed to keep your allocation in line with your goal. With disciplined rebalancing—that is, managing the proportions of stocks, bonds, and other assets in your portfolio over the long term—you can help control risk and keep your investment plan on a steady course.
However, because rebalancing often involves moving assets from your best-performing holdings into assets that have declined in value, the process can be emotionally difficult. But to be a successful investor, you need to be able to stick with your plan to keep your portfolio on track.
Finke recommends investing in automated funds—such as target-date funds—that maintain a stated allocation to stocks, bonds, and short-term reserves. For these types of funds, rebalancing is part of the strategy.
“I hold investments that automatically rebalance,” he said. “If it’s automated, I’m not responsible for rebalancing. I’m much happier doing it that way, and my investment performance is ultimately better if I pull myself out of the equation.
“Similarly, when investors know that their portfolios are being automatically managed, they won’t feel the temptation to constantly make changes to their investments.”
Finke is living proof that even the best and brightest investing minds may be better off taking a step back from following the markets so their portfolios can move forward.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
Opinions expressed by Michael Finke aren’t necessarily those of Vanguard.