The Retirement Balancing Act: Discipline, Strategy, and the Allure of Fun

People who are saving for retirement face a number of challenges. There's the effort required to get your finances in order so you can save aggressively. There's the discipline required to stay the course when markets are on a roller coaster ride. And then there's the temptation to make investing fun.

Having “fun” with investing is when you use your own knowledge to pick funds in industries that seem poised to beat the market. You may choose investments that focus on a field you actually work in, like medical imaging. You might have a lot of experience with popular activities like ocean cruises. Or maybe you've just been closely following an emerging technology, like electric powered aircraft that can take off vertically.

The thinking goes that whatever your area of knowledge, you have insight into its inner workings that's above average. So, it's reasonable to think your investing picks in this narrow sector will have performance that's also above average. And of course, there's nothing quite as fun as confirming how smart you are by beating the market averages. That's the hope, at least. Unfortunately, the reality is usually quite different.

Jeffrey Ptak, a Certified Financial Advisor, did an analysis for Morningstar on the overall performance of these kinds of "thematic" funds.¹ He writes, "For those unfamiliar, thematic funds typically track indexes that filet the market into thin slices based on a theme like innovation, cloud computing, artificial intelligence, financial technology, cybersecurity, cancer, airlines, you name it."

Ptak explains that these funds tap into trends that have captured the public's imagination, making investing in them much more entertaining than dull, broad diversification. However, when he ran a three-year performance analysis of these funds, he found that on average they not only lagged behind the market as a whole but actually lost money.

There were a few reasons for this:

1. Thematic funds are poor performers. By the time the public learns about the innovations their stocks have already peaked.
2. Investors in the funds show poor timing. People tend to buy into these funds near their peak and sell when they decline, putting fund managers at a disadvantage.
3. Thematic funds are more expensive. You pay a premium to invest in the latest thing.

The disciplined investor knows that one of the keys to long-term success is taking emotion out of the equation—both good and bad. You don't try to get that winning feeling by predicting the next big thing. You don't immediately dump your "losers" at the first sign of volatility.

The strategy which has yielded success for millions of investors has often been described as "boring." With the guidance of a trusted advisor, you consistently follow your personalized plan, resisting the urge to quit or to find a shortcut to your goals.

 

1. http://go.pardot.com/e/91522/y-your-investments-try-14-year/96kx6d/2760939443/h/dQLYFku68UPG5Zk41-MAoqJ4F6bGca7uVDEnyO_QWYE