I live in Phoenix, Arizona, where it’s virtually summer year-round. It comes with more benefits than the number of sunny days. Notably, I’ve started to bike to work. But this newfound benefit also comes with different hazards compared with commuting in the Philadelphia suburbs where I grew up.

Nearly every time someone learns that I commute by bike their first comment is, “In this heat?” The second comment is something like, “Be careful! There are so many unpredictable drivers. That’s dangerous!” Yes, Phoenix is hot and, yes, there are a lot of cars. But I’ve found that sometimes the biggest threat to my safety is my own focus.

During one of my rides, I was humming along a desert trail when I hit a patch of gravel. It wasn’t very deep, but it was enough to twist my front wheel and send me careening toward a massive saguaro cactus. I couldn’t take my eyes off it and its large, threatening spines. I managed to correct course just in time to avoid an acupuncture appointment with nature. I’d experienced target fixation for the first time.

Potential hazards

The simplest definition of “target fixation” is focusing on the wrong thing and then crashing into it. Many cyclists and motorcyclists experience this, but car drivers and pilots can experience it as well. Most people tend to steer in the direction of the object that has their attention.

I’ve found in my work as a financial advisor in Vanguard Personal Advisor Services® that many investors experience target fixation. Here are some of the most common forms I’ve seen:

  • “The stock/bond market will …” fixation. I’ve had many clients say things like: “Interest rates are bound to go up and that spells nothing but trouble for bonds!” “Stocks went up too quickly after the global financial crisis, so I was waiting for them to come down to safer levels.” “Stocks went down in 2018 and looked really scary, so I moved to cash.” “Isn’t this a bad time to be buying stocks? I keep hearing about a recession.” “Bonds don’t do anything!”
  • The “Superhero Fund” fixation. Some investors call this their “all weather” fund or brag about its recent performance. They may even compare their Superhero Fund performance to other stock funds as evidence of their good pick. All other mutual fund or ETF (exchange-traded fund) options have fallen by the wayside because nothing can hold a match to this investor’s personal Superhero Fund.
  • “Product” fixation. Some investors managed to weather market events and, in doing so, managed to accumulate 10, 15, or more different mutual funds or ETFs in their portfolios. Some of the funds were the result of recommendations from friends or family, some were chosen for their past performance, and other positions don’t really have an explanation—they just ended up in their portfolios.

A better target

You can avoid target fixation by focusing on a better target: target asset allocation. Having a target asset allocation is a great way to address volatility, performance, and balance.

More than 90% of investment outcomes are a result of a portfolio’s asset allocation.* That means less than 10% of your portfolio’s long-term performance will be determined by your actual mutual fund or ETF choices. Having a target asset allocation can help you better understand the kind of volatility you’ll experience based on how you’re diversified. Remember, diversification isn’t about the number of products you use, but rather how far those products reach. With a target asset allocation, you can ignore the “cactus” ahead (market events, geopolitical events, tax events, etc.) and focus on what really matters. But for diversification to work, you must be disciplined about setting a target asset allocation and maintaining it through rebalancing. Otherwise, you could be steering right into the proverbial cactus.

Keep your emotions in check

I suspect there are 2 reasons why investors succumb to target fixation: the lack of an articulated investment plan and basic human emotions.

  • Fear can make you more susceptible to market events or movements. This could lead to destructive investment decisions—like buying high and selling low or staying out of the market altogether.
  • Greed can lead you to get fixated on one particular mutual fund or ETF. In turn, you could lose sight of the rest of your portfolio and ignore market and economic indicators that can provide meaningful context for investment behavior.
  • Uncertainty can cause you to accumulate a dozen or more positions in your portfolio. The sprawl gets to be too much to handle, resulting in you not putting in the time to herd your portfolio back to a focused strategy.

Ask yourself these questions

Am I keeping my emotions out of my investment decisions? Do I have the time, willingness, and discipline to manage my financial plan? If you answered “no” to these questions, consider hiring an advisor who can help you figure out what’s important to you and help you reach your goals. Along the way, an advisor can guide you through the curves ahead, help you avoid the occasional financial “cactus,” and keep you focused on your long-term goals.

*Source: Vanguard’s Principles for Investing Success.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
  • There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Diversification does not ensure a profit or protect against a loss.
  • Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk.
  • Advisory services are provided by Vanguard Advisers, Inc. (VAI), a registered investment advisor.