Ignore Your Gut Instincts When Investing
If you’re like most people saving for retirement, your gut may very well steer you wrong.


One of the smartest things you can do as an investor is to stop making moves based on your gut instincts. You will probably become a much better investor, because studies show your portfolio is likely to perform better if you avoid excessive trading.
It’s tough to ignore these impulses when stocks are turbulent, up one day and down the next. But if you’re trying to time the market based on hunches — your own or those you hear from friends, family or media “experts” — you could be setting yourself to make the wrong investment decisions, causing your investments to underperform.
Emotional decisions are usually bad decisions; after all, no one ever intends to sell low or buy high. But that’s what can happen to investors who are working without an investment plan or who stray from their plan because they get nervous or greedy.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
According to Dalbar, the consulting firm known for its annual “Quantitative Analysis of Investor Behavior” studies: “No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who try to time the market.”
Every year Dalbar compares the returns of investors to benchmark indices over various periods of time, and the differences are significant. In the 30-year period ending December 2016, for example, the S&P 500 averaged 10.16%, while the average active equity fund investor earned 3.98% annually.
Now, I know what you’re thinking — and you’re right: Part of that discrepancy is due to fees. But the big difference, Dalbar points out every year, is the timing decisions investors make. Here are some of the mistakes I see investors make over and over:
1. They fall prey to “recency bias”
When it comes to investing, their gut tells them to buy when the market is going up — and to buy the funds that have been going up recently. They also tend to avoid the stocks and funds that have been doing poorly, assuming things will continue to occur just as they have been. But of course, that’s not how it works.
With a 24/7 news cycle and today’s global market, seemingly any little thing can change an investment’s value overnight. If you see a blogpost that says, “5 Funds to Buy This Year,” it’s probably based on the five funds that did the best last year. NO ONE knows how they’ll do in the future.
2. They feel the need to make adjustments
Generally, there is no need to make major adjustments over the short term. Investors should have a long-term time horizon. Otherwise, every downturn can seem potentially devastating, and the temptation to sell can be overwhelming.
During the financial crisis of 2008, there actually was a spike in Google searches for chest pains, headaches and ulcers. People became physically ill as they watched their accounts lose value. They needed to feel better, and the way to feel better was to get out of the market.
The problem with that is that most investors lack a definitive re-entry strategy. What is the plan to resume your investment strategy? When your gut tells you it’s time? When your nerves calm down after a year on the sidelines? When you see the market has been up 20% for six months?
If you don’t have an exit and re-entry strategy, your best bet is to simply sit tight and wait for your investments to rebound.
3. They don’t understand volatility or their personal risk tolerance
Managing a client’s investment behavior is a financial professional’s most important role. Your adviser should help you create a portfolio that’s adequately diversified, mitigates risk and keeps volatility low, so you can enjoy the returns from your investments instead of bailing out too soon.
How soon is too soon? The reason the S&P 500 consistently outperforms investors in the Dalbar study is because most investors are unable to endure the market’s volatility.
Warren Buffett’s advice is to “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
To get the rewards of the stock market, you need to be able to ride out the volatility, but everyone has their limits. Know yours. You should understand going into any investment what the risks and possible range of returns are so that in a worst-case scenario you aren’t surprised. I believe that’s your best shot at remaining disciplined.
4. They don’t know where else to go with their money
People often think they’re “diversified” if they have a few different mutual funds. But a truly diverse portfolio combines traditional investments (with some high- and some low-volatility choices), alternative investments (real estate, commodities, private equity, etc.) and insurance products (indexed annuities and modified endowment contracts). Some investments are correlated to the stock market and some are not.
Most 401(k) plans have limited investment options, so investors may have to utilize non-retirement assets to balance out their portfolios.
5. They aren’t paying attention to their personal timeline
The closer you get to retirement, the more you’ll need to consider wealth preservation over accumulation. It’s critical that you protect the money you’ll need for income when your paycheck goes away. It’s OK to remain aggressive with some of your funds if you have other assets that will keep that income flowing when (not if) the market takes a dip. But if your savings are limited, you should be dialing down the volatility in your portfolio as you get older.
The best way to avoid these mistakes is to make and stick to a financial plan. Knowing where you’re going and how you’re going to get there can make the journey far less challenging.
Start with products and strategies that suit your needs. Talk to your adviser and assess the pros and cons. And every time you’re tempted to make a change, resist those impulses and stick to your plan.
Kim Franke-Folstad contributed to this article.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Keith Singer, owner and president of Singer Wealth Advisors, is a CERTIFIED FINANCIAL PLANNER™. His firm is an SEC-registered investment advisory firm. Mr. Singer is also a licensed Florida attorney. He is the host of the radio show Prosper! With Keith Singer, which currently airs on five stations in South Florida.
-
What the Capital One Discover Merger Means for Your Wallet
The Capital One Discover merger reshapes the credit card landscape and could impact your credit card rewards, interest rates and card perks.
By Paige Cerulli
-
My Advice for Enrolling in Medicare Part B — Based on Experience
Enrolling in Medicare is notoriously complicated and can result in penalties if you get the timing wrong. Here are some valuable tips for first-timers.
By Sandra Block
-
Before You Invest Like a Politician, Consider This Dilemma
As apps that track congressional stock trading become more popular, investors need to take into consideration some caveats.
By Ryan K. Snover, Investment Adviser Representative
-
How to Put Together Your Personal Net Worth Statement
Now that tax season is over for most of us, it's the perfect time to organize your assets and liabilities to assess your financial wellness.
By Denise McClain, JD, CPA
-
Stock Market Today: Trump Retreats, Markets Rejoice
Stocks rally, yields soften, the dollar rises, and even beaten-down names enjoy the wages of potential trade peace.
By David Dittman
-
Bouncing Back: New Tunes for Millennials Trying to Make It
Adele's mournful melodies kick off this generation's financial playlist, but with the right plan, Millennials can finish strong.
By Alvina Lo
-
Early-Stage Startup Deals: How Do Convertible Notes Work?
Some angel investors support early startups by providing a loan in exchange for a convertible note, which includes annual interest and a maturity date.
By Murat Abdrakhmanov
-
Stock Market Today: Stocks Soar on China Trade Talk Hopes
Treasury Secretary Bessent said current U.S.-China trade relations are unsustainable and signaled hopes for negotiations.
By Karee Venema
-
SRI Redefined: Going Beyond Socially Responsible Investing
Now that climate change has progressed to a changed climate, sustainable investing needs to evolve to address new demands of resilience and innovation.
By Peter Krull, CSRIC®
-
Here's When a Lack of Credit Card Debt Can Cause You Problems
Usually, getting a new credit card can be difficult if you have too much card debt, but this bank customer ran into an issue because he had no debt at all.
By H. Dennis Beaver, Esq.