Doing nothing might sound like terrible financial advice, but when it comes to the investment game, it could be the best advice there is.
Of course, doing nothing comes after you get your strategy off and running, but in this article, we’ll explore the benefits of a hands-off approach for your investment portfolio. We’ll also discuss why investors often feel the urge to act and change their investments, the risks of doing so, and the benefits of a passive investment strategy.
Hopefully, this will give you a deeper understanding of investing as a whole and help you move forward with confidence and peace of mind.
Why Investors Feel The Urge To Change Their Investments
The news and social media play a big role in triggering reactionary moves from investors. With pressure to act coming from all angles, many believe that they’ll miss opportunities if they don’t tweak and change their portfolio regularly.
This is exacerbated in times of market volatility when your investment portfolio may see dips. Emotions often get the better of investors during these periods, and fear and greed drive decisions that are harmful in the long run.
There’s also the fact that many investors try to time the market and follow the latest trends to “beat the market”, even though this is incredibly difficult to do, even for seasoned professionals.
The Risks of Overactive Investing
Firstly, timing the market is difficult to the point of impossible, and studies show that most investors get their decisions wrong when they try to time and buy their investments.
There’s also the risk of selling in a panic when the market and your investments are experiencing downturns or negative reviews lead you to sell investments at a loss.
Both of these can result in missing out on future growth by being overactive with your investments, which is why setting your strategy up for the long term is highly advised.
The Power of Doing Nothing
With a well-diversified investment portfolio, your best course of action is often to stay put and ride out any volatility and uncertainty. Timing the market is often futile and the longer you plan on sticking with the plan, the more likely the market is to recover from downturns.
This has been the case historically, and long-term investments outperform short-term investments and more often than not, lead to positive results.
Compounding growth (when you invest your gains and interest as well as your initial investments) is another huge factor, and keeping your investments without interfering allows for compounding to work its magic.
It’s also cost-effective to leave your investments alone because frequent activity can trigger trading fees and additional tax liabilities.
All of this means you have less stress, more peace of mind, and more time to focus on other goals, building your wealth through other means rather than obsessing over investment performance.
How To Do Nothing Effectively
- Think long-term and diversified
Select investments that align with your financial goals and risk appetite.
- Set it and forget it
Automate your contributions regularly to avoid emotional decision-making.
- Review and rebalance periodically
Nothing should be your motto on a day-to-day basis, but check in regularly (every six months to a year) to ensure performance aligns with your goals.
- Stay informed
Keep an eye on long-term trends rather than daily fluctuations and don’t act on every piece of investment news you read.
Conclusion
Investments aren’t about quick wins and history shows us that sticking it out for the long term with a diversified portfolio is much more effective than a short-term approach or trying to time the market.
Instead of chasing short-term trends and being swayed by the news or social media, trust the process and believe the power of doing nothing.
For more advice about your investments, give us a call at 020 8366 4400 or email enquiries@cedarhfs.co.uk.