Uncertainty and market volatility can make you feel anxious that can eventually lead to poor decision-making with your money.
Sometimes reacting emotionally to your investment can cost you financially and affect how you will invest your money in the future. One of the best advice to give investors like you is to stay calm when markets go down and avoid mistakes others will make.
Dealing with Emotions and Investment
Historically, markets have followed a natural cycle - an annual pattern where one can expect a negative market followed by a return to growth.
Commonly, when markets are going up, investors are confident to take on risk in search of a higher return. But when prices go down, we become quickly disheartened and our enthusiasm disappears. Instead of accepting and understanding the occasional declines as part of investing, we often get scared to take more risks. And if things get bad enough, we will likely sell out.
The experience of market losses can make you more cautious in how you invest your money and this can lead you toward investments that are more conservative. For most people, taking on some risk is important in order to generate enough investment growth and help them achieve their financial goals and protect their wealth from inflation.
Taking Emotion Out of Investing and Staying on Path to Achieve Results
Control the noise
Even if you're not the type who is anxious and worrisome, there are times when it's almost impossible to ignore what’s going on in the market. With today’s technology, availability of smartphones and the always-on social media, an investor can simply have easy access to so much information.
Although easy access to information and market conditions is good, it can also post some challenges.
The more volatile things get, the more you'll watch the markets, and the more you watch, the more anxious you become. It might even lead you to overreact to the headlines and make quick decisions with your investments.
When investing, make sure to keep a balanced approach. Always be aware of what's going on in the market, but make sure to resist the temptation of over-monitoring your investment portfolio. If you ignore the headlines and daily ups and downs of the market, you'll be able to keep your emotions in check and stay focused on keeping your goals.
Assess and Rebalance
If you're a long-term investor, your "buy-and-hold" strategy can easily turn into "buy-and-forget". The current market volatility offers a good opportunity to stand back, assess your portfolio, and decide if any changes have to be made.
Meanwhile, if you work with an advisor to establish your assets according to your risk tolerance and objectives, now is the time to evaluate your portfolio.
While no investor likes to lose money, there may be times when selling at a loss makes sense. An investment might have little chance of regaining its value or it may no longer fit your plans. And sometimes, holding on means you tie up valuable cash that can be put to work elsewhere.
Use losses to first offset any capital gains you incur from rebalancing your portfolio. This will reduce taxes you might otherwise have to pay. Afterward, if you still have losses you haven't claimed, you can apply these against future gains or carry them back up to three years.
Learn from investment history
It's challenging to keep your composure when the market drops suddenly, taking your portfolio down with it. But investment history teaches that dark days will eventually end and markets will resume in time.
Unfortunately, this lesson can be hard to recall especially when it’s time for you to remember it. People tend to think that each downturn they're experiencing is different and worse than anything they've gone through in the past.
A long-term investment plan requires a disciplined approach where you control your emotions especially when the value of your investments is in flux.
When markets are going down and your investments drop in value, you may become anxious, or worry about the impact on your financial well-being. And when markets take a turn and start climbing, you may become a bit over-confident, willing to take on more risk to see your assets grow further.
It may be understandable to have these emotions but acting on them in your investment portfolio can be critical.
Think of the long-term implications when you invest. Here are some tips to help you keep your emotions out of your investment.
Ask yourself big picture questions
You may have all the good reasons why you began investing in the first place, which helped you determine how your portfolio is built. It may be best for you to revisit these investment goals when market volatility picks up to see if anything has changed.
Ask yourself the big picture questions like if your investment time horizon, the same as it was when you built your portfolio, if your financial situation is the same, if your portfolio is aligned with your risk tolerance, or if there is an appropriate level of diversification.
If the answer is yes to most of these questions, then you have to ask yourself why you need to make any changes. And if the only thing that has changed is the short-term value of your portfolio, ask yourself too if this should affect your long-term plan. These bigger picture questions can help you shift the focus away from the investment discomfort.
Stop checking your investments every day
Are you guilty of checking your portfolio on a daily basis? One way to reduce the emotional impact of market volatility is by simply applying a long-term view and looking at your investments less often.
When negative market performance is all you hear about, increasing the frequency with which you review your investments will only serve to increase anxiety.
Despite many reasons not to invest, history shows that over the long term, markets have yielded a positive path out of those negative periods and investors who continued their investment journey have been rewarded. By not checking your portfolio balance each day, you increase the chances of staying on track and seeing the benefits of that approach over the long term.
If you are nervous about market volatility and are thinking about moving your investments to cash, it is important to understand that doing so will introduce several new risks to your portfolio. While moving to cash may feel safe, remaining in cash for an extended period of time ultimately erodes your purchasing power.
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