Investors Focus on Wrong Performance Factors

A new TIAA-CREF survey indicates that more than half of investors look to short-term performance factors when making investment decisions, while nearly one-third mistakenly believe all investments carry the same overall level of risk.

Overall, 36% of investors look to one-year performance as the “most important indicator of an investment’s return,” while an additional 16% look to quarterly performance.  TIAA-CREF found that nearly half of investors have purchased a fund “based on its performance during the previous year rather than looking at its performance over a longer-term investment horizon such as five or 10 years.”

One year or one quarter is a short period of time for people investing for 30 years or more.  

A second troubling statistic from the study is that 71% believe investment risk can be completely eliminated by having a diversified portfolio.  Although a well diversified portfolio can help manage investment risk, it cannot be eliminated.

Finally, 53% of U.S. investors think that higher risk guarantees higher returns.  Among Millennials (those born between 1976 and 2004) it is worse: 64% think that higher risk guarantees higher returns.  Always keep in mind that investments carry no guarantees regardless of risk level, diversification, or past performance.

Having a well-defined vision of one’s financial goals is a good first step for investors.  A good second step is to call us to help find the right approach for you.