Whether you’re new to the stock market or a seasoned investor, it can be hard to keep your emotions in check. As you hear unsavory news about the stock market, your first instinct may likely be to sell out and move to cash. Yes, your portfolio may drop in the following days or weeks, but when it comes to the stock market it’s important to think long term. Selling your holdings based on an emotional response could mean you miss out on significant earnings years or decades later down the line. 2020 is still fresh in our minds and was a perfect example of this. Think back to March of 2020 and all of the uncertainty surrounding the coronavirus, stock markets, and the political and social unrest. Investor’s emotions were put to the test. Those who stuck it out and stayed invested were rewarded by the rebound of the stock markets the rest of the year. While this is still fresh in our minds, FJY has five easy tricks you can use to help avoid getting emotional about your investments.
Trick 1: Find a Partner
Working with advisors (like the ones on FJY’s team) can be your first line of defense against behavioral investing. Some investment advisors or financial planners may act as a behavior coach. In doing so, they can prepare you ahead of time to react calmly and unemotionally in times of market change. If you do tend to take an emotional approach to your investment decisions, you may find an extra set of eyes on your portfolio to be worth it.
Trick 2: Put Your Plan in Writing
Do you have a favorite chocolate chip cookie recipe? You’ve made it so many times, the recipe is practically etched into your head. But let’s say you go to make them, and you get a bit distracted. With your focus astray, you may start to question what you thought you definitely knew. Was it ¾ cup of sugar or a half? I swear I bake these at 375 degrees, but now I can’t remember for how long. Before you begin to panic, you can grab the cookbook and double-check the recipe. Within minutes, you have total peace of mind that you added the right amount of sugar and set the timer correctly.
Think of your investments in the same vein. Putting your investment plan in writing can provide you with that same reassurance when doubts arise and your emotions begin to take over. If you’ve made a proper, thoughtful investment plan, you have likely already prepared for the good and the bad. Seeing this in writing can provide the relief that you’re doing the right thing.
Trick 3: Forget About Your Portfolio… For a Bit
For many investors, the principle of loss aversion can hold true – they feel the pain of loss in value much stronger than they feel the happiness when those same stocks are performing well. If this sounds like you, it might be time to take a step back from your portfolio. While regular review and rebalancing is often necessary, you may want to resist the urge to check on your stocks too frequently (daily, weekly or even monthly). With the loss aversion principle in mind, doing so may lead to more frustration than elation. This could easily entice you to make an emotionally driven decision regarding your investments.
Trick 4: Focus On What You Can Control
This may be the most helpful trick. Though managing your finances can quickly become over whelming, there are a lot of things you can control. Starting with these:
- Build an emergency fund that will allow your portfolio to ride out a storm. Investors want to avoid selling from investments at a low to fund cash needs.
- Create a budget that puts you in charge of your money, allowing you to direct your money to what matters most to you.
- Talk to your advisor about tax strategies that take advantage of market downturns.
- Focus on your long term plan and maintain your discipline. When things feel like a roller-coaster remember the tips in this blog, lean on your adviser, read over your plan, and focus on the things you can control.
Removing your emotions from your investments is easier said than done. And in some instances, it can actually be beneficial to take stock of how market changes make you feel. For example, your comfort level during a market downturn can help you understand whether or not your risk tolerance is at the appropriate level. But as you tune in to the nightly news or read about your favorite company online, remember to step back and think about your portfolio’s big picture. Doing so could save you from missing out on major investment wins later down the line.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.