How do your finances make you feel?
Do you feel anxious about growing or sustaining your retirement funds?
Hopeful for the impact your legacy will leave?
Concerned with market fluctuations you see covered in the evening news?
When it comes to managing your wealth, it can be complicated to separate your emotions from your investments. But could your emotions be feeding into the less-than-stellar performance you fear?
However, there are ways to strive to get the most out of your financial activity.
Understand and Identify Emotional Investing Behavior
Before you can reverse the trend of emotional investing behavior, it’s important first to understand what the behavior looks like. You won’t be able to successfully overcome your emotions until you can identify the things that trigger emotional responses.
What should investors do in the following scenario:
a. Buy low, sell high (and make a profit)
b. Buy high, sell low (and lose money)
The answer here, as we all know, is “a”. However, market trends play heavily into investor emotionality and real life is not so simple. After all, it can be difficult to tune out the barrage of financial information you receive each day.
Everyone wants to avoid major investment losses and own the next hot company with an amazing product that has been all over the news.
When it comes to exciting investment opportunities, should investors:
a. Research the company (mutual fund, ETF, etc) and potentially invest?
b. Ignore the news, stick to their long term plans, and invest as before?
The answer to the second question is not as easy. Although “a” might feel more natural because of the positivity, you know that “b” is probably the right answer even though it might not feel as good. This is why you see articles with titles such as “10 Funds to Own Next Year”, “Where to Invest Now”, or “All Signs Point to Bear Market”.
Whether you see something on the news, read a blog post about downturn in the tech sector, or are exposed to negative opinions on certain financial ideas in a Facebook group that you participate in, it can be hard to get through a day without something shaking your confidence in your financial future.
Being impacted by this information isn’t necessarily a bad thing. It’s what you do as a result of receiving new – and often conflicting – information that matters.
Don’t Follow Emotional Investment Trends
It can be hard to resist the knee-jerk reaction to receiving information that makes you question your investment decisions. And this is a pattern that’s surprisingly prevalent throughout the larger history of human financial behavior.
Think of events like the Great Depression, Black Monday and the recent financial crisis of 2008. Each of these events has something major in common: investors reacted with fear to significant financial news and pulled their money out of investments that they thought might cause them future harm.
When markets are bad, people may be anxious to rid themselves of their investments and may sell as quickly as they possibly can. Of course, when everyone is trying to sell, the market becomes saturated and prices decline, sometimes excessively – think back to returns during the aforementioned periods.
Conversely, when things are going well, people may become confident and may want to invest more money. This is a self-fulfilling prophecy that causes prices to rise. Purchasing when things look good and prices have risen is the very definition of “buying high”.
Manage Your Investments by Seeking the Right Counsel
Despite what we may see on the surface, investing, at times, is not natural. This matters because if we do not understand investing, we can lose our money.
So how can you avoid emotionality in investing?
First, understand that investing is about more than missing a hypothetical gain or avoiding a hypothetical loss. Investing should be about designing a plan to reaching our goals, finding the right investments for the plan, and making adjustments along the way.
A CERTIFIED FINANCIAL PLANNER ™ practitioner can help ease your fears as you consider your investments and will help you decide which options are the best for your present status, as well as your future. Even if you have a hard time taking a step back to view your financial factors objectively, your financial advisor can help you see through them with clarity.
Certified Financial Planner, Jacob Sturgill, can help you look at the markets objectively
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.