Emotions and Investing: Two things that never mix well.
One of the biggest challenges we face as advisors is highlighting the importance of not letting your emotions get the best of your investments. Allowing emotions to become mixed up in decisions that involve the stock market is never a good idea. We’d even go as far to say that emotions are smart investing’s biggest “enemy”. While we’re all human at the end of the day, the stock market can be quite a roller-coaster and days when we see fluctuations in the market can sometimes result in people making drastic decisions about their investments. So what is emotional investing and how do we avoid it?
“Emotional investing is when an investor makes drastic decisions about their portfolios based on a recent turn of events in the markets”
Why is this bad? Emotions like panic, fear, anger or greed typically don’t have any reasoning behind them.
Good investing practices are based on sound reasoning and monitoring trends in the market. Emotions tend to deviate our ability to remain focused on the long-term intent of the original investment plan. A great example of this would be looking back to the last quarter of 2018 when the news headlines continued to focus on a “possible” recession. Many of these headlines were so focused on the rhetoric and the emotional aspect of a possible decline in the market, that they were ignoring what the data was indicating. Those investors that panicked and sold their portfolios at this point in time would have completely missed out on the economic upswing we’ve seen so far in 2019.
The point being that the data should always speak louder than the noise surrounding it.
So how do we avoid letting our emotions get the best of our investments?
1.Diversify your risks
2.Don’t focus too much on the short-term ups and downs of the market.
3.Stick to your long-term financial plan. It was put in place for a reason, especially if it was put in place by our team!
4.Try not to over-monitor how your investments are doing. With a solid, long-term financial plan put in place small fluctuations in the market often don’t merit worry
5.Look at the reasons behind why you want to make a change in your long-term portfolio. Is it associated with panic due to a shift in the market? Or a current need for funds?
6.Don’t let the nightly news headlines, which tend to sensationalize things be your only source of information when making a decision
7.Never hesitate to call your advisor to discuss your anxiety about the markets, that is why we are here!