5 mindset shifts to give your portfolio a nudge

Investment habits can be hard to make—and break. Patrick explains how “mental tweaks” can move you in the right direction.

By now, some of you may be suffering from a mild case of resolution-fatigue, an overload of helpful suggestions on how to make them, how to keep them, why they don’t work. Investment habits are usually in the mix, whether it’s contributing to your 401(k), reading your statements or sticking to your asset allocation plan.

Instead of feeling bad about making well-intentioned promises and not keeping them, I’m proposing a slightly different tack: Use the first weeks of the new year to focus on your mindset. Change your thinking, and the behavior will follow.

The following are subtle but powerful “mental tweaks” that can help you make more thoughtful investment decisions all year long. They’re drawn from behavioral science and supported by learnings from our discussions with thousands of financial advisers.

1. Accept that you don’t have all the answers

While it’s good to have convictions, it’s important to recognize that we tend to favor information that reinforces our held beliefs. You can challenge these confirmation biases by proactively seeking other points of view and really listening. If, for example, you’re convinced that interest rates are going to rise (as many investors currently are), find a contrarian and ask him or her to explain. Even if you ultimately decide that your position is the right one, understanding the opposing case may help you pinpoint any holes in your rationale. That can motivate you to incorporate investments that will work should your thesis be proven wrong.

2. Get comfortable with being uncomfortable

It’s hard to make progress without a few missteps. Accepting the reality that losses are part of the process will help you prepare for and ultimately tolerate them better. So if you like stocks, know that it’s going to get ugly sometimes. Before it does, identify investments that can play defense during a decline—then own them consistently. Yes, it may feel uncomfortable when they’re holding you back month after month. But it’s like setting off on a mountain climb with your safety ropes firmly secured. Cumbersome much of the time but you’ll be glad you have them if your footing slips.

3. Turn off news alerts and focus on the information that matters to you

It’s easy to get sucked into the daily dance of the Dow or S&P 500 Index. But it truly has nothing to do with you and what you want to achieve long term. Keep your eye on whether you’ll have enough to spend throughout retirement, or send your children to college. Unlike the headline noise, you’re trying to grow your money judiciously—participating in some stock market upside but also being aware of what you can afford to lose. Resolve not to feel jealous when the S&P 500 is breaking records and your portfolio is lagging.

4. Ask “what if?” more often

This is about stress-testing your portfolio, imagining a range of likely—and unlikely—scenarios that could impede the success of your plan. What if U.S. stocks take a big hit next year? What if they keep climbing? What if inflation rises more quickly than I expected? What if I lose my job or have to stop working? What’s “the perfect storm” for my portfolio, and what would I do if it happened? These scenarios may or may not have an impact, but it’s important to consider possible pain points, see where you’re vulnerable, and be prepared.

5. Change your mind about one big thing this year

The status quo bias is another behavioral trait that often keeps us from acting in our best interest. This is a preference to keep things the way they are or stick with a decision you made earlier, no matter what. For example, it could be tempting to believe that U.S. stock performance will continue upward indefinitely, and thus extrapolate that simply owning U.S. large-cap stocks is the sure pathway to success. That ignores the historical reality of market cycles. Like the confirmation bias, this type of myopia can lead to trouble.

Ultimately, you’ll want to prepare for something new to become the next leader. Changing your thinking is the first step to making it happen.

Patrick Nolan is the Portfolio Strategist within BlackRock’s Portfolio Solutions group. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

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