Groundhog Day is almost here. For most of its history — which, according to some reports, dates back to the first celebration in 1886 or 1887 in Punxsutawney, Pa. — Groundhog Day held little significance for most Americans.
But that changed in 1993 with the release of the movie Groundhog Day, in which a semi-embittered meteorologist, played by Bill Murray, is forced to re-live the same day over and over again. He repeatedly makes poor choices, until he finally learns from his mistakes and is granted the ability to move on with his life. Since the movie came out, the term “Groundhog Day” is often used to refer to a situation in which someone repeats the same mistakes. It’s a phenomenon that happens in many walks of life — including investing.
So, how can you avoid becoming a “Groundhog Day” investor? Here are some suggestions:
• Don’t chase after “hot investments.” Many investors make this same mistake over and over — they hear about a “hot” investment from a friend, relative or television commentator, and they buy it. Too often, though, by the time they purchase this investment, it’s already cooling down. Even more importantly, it just might not be suitable for them. So instead of pursuing “hot” choices, pick those investments that are appropriate for your needs, goals and risk tolerance.
• Don’t over-analyze short-term price fluctuations. Some investors check their portfolios’ performance every day, or even several times a day. But if you’re constantly evaluating how your investments are doing over short intervals, you may be tempted to make unwise decisions in response to sudden drops or jumps. You can get a good sense of the progress you’re making toward your goals by checking your portfolio once a month.
• Don’t let fear and greed drive your choices. “Buy low and sell high” is the classic piece of investment advice. But too many investors only buy investments when they’re on the rise and sell them when they’re falling. In other words, they’re doing the opposite of “buy low and sell high” — and they’re being driven by fear and greed. Keep these emotions out of your investment strategy, and you’ll help yourself greatly.
• Don’t maintain unrealistic expectations. Some people consistently put off investing until “later,” figuring they can always catch up by putting away more money during their peak earning years. Don’t make that mistake. To achieve your long-term goals, such as a comfortable retirement, you need to invest early and keep investing, rather than wait for a time in your life when you may suddenly have more money “freed up” for investment purposes. Also, don’t anticipate that you’ll steadily earn a good rate of return on your investments. Although the financial markets have trended up in the long term, we’ve seen many down markets that have lasted for a year or longer. Factor in these fluctuations when estimating the rate of return you’ll need to achieve your goals. For these types of calculations, you may want to work with an experienced financial professional.
These and other “Groundhog Day”-type investment mistakes can be costly. But you can avoid them if you maintain a solid investment strategy, if you’ve got patience and perseverance — and if you stay focused on the long-term horizon.
Be Aware of Risks of Not Investing
You’ve no doubt heard about the risks associated with investing. This investment carries this type of risk, while that investment carries another one. And it is certainly true that all investments do involve some form of risk. But what about not investing? Isn’t there some risk associated with that, too?
In fact, by staying on the investment sidelines, or at least by avoiding long-term, growth-oriented investments, you may incur several risks. Here are some to consider:
• You might not keep up with inflation. If you put all your money under the proverbial “mattress,” or, more realistically, you keep it all in “cash” instruments and very short-term investments, you might think you are “playing it safe.” After all, you might reason, your principal is protected, so even if you don’t really make any money, you’re not losing it, either. But that’s not strictly true, because if your money is in investment vehicles that don’t even keep up with inflation, you can lose ground. In fact, even at a relatively mild three percent annual inflation rate, your purchasing power will decline by about half in just 25 years.
• You might outlive your money. For a 65-year-old couple, there’s a 50 percent chance that one spouse will live past age 90, according to the Society of Actuaries. This statistic suggests that you may need your investments to help provide enough income to sustain you for two, or even three, decades in retirement.
• You might not be able to maintain your financial independence. Even if you don’t totally run out of money, you could end up scrimping by — or, even worse, you could become somewhat dependent on your grown children for financial assistance. For most people, this prospect is unacceptable. Consequently, you’ll want to make appropriate financial decisions to help maintain your financial independence.
• You might not be able to retire on your terms. You would probably like to decide when you retire and how you’ll retire — that is, what sort of lifestyle you’ll pursue during retirement. But both these choices may be taken out of your hands if you haven’t invested enough to retire on your own terms.
• You might not be able to leave the type of legacy you desire. Like most people, you would probably like to be able to leave something behind to your family and to those charitable organizations you support. You can help create this type of legacy through the appropriate legal vehicles — i.e., a will, a living trust and so on — but you’ll still need to fund these mechanisms somehow. And that means you’ll need to draw on all your financial assets, including your investments.
Work with your financial advisor to determine the mixture of growth and income investments you need during your working years and as you move toward retirement to help you meet your retirement goals. However you do it, get into the habit of investing, and never lose it — because the risks of not investing are just too great.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.