5 KEYS TO REMOVING THE EMOTIONS FROM INVESTING
One of the hardest things to do in investing is removing emotions from your decision making process. Human emotions are messy, and generally lead to making decisions that aren’t ideal for long-term success. When markets are down, an investor constantly sees that they are losing money, the media is continually flooding more bad news over the networks, and the fear of uncertainty rises. During these times it can be very difficult to stay unemotional. But that is exactly what needs to be done in order to make the best long-term decisions. By the way, getting caught up in emotions in investing isn’t only a trait linked to down markets. The same can be true when markets are rising. Chasing returns, following the herd into investments that are overvalued or overly speculative (ex. Bitcoin in 2018, Tesla, Beyond Meat, marijuana stocks), or over-stretching risk limits can also have a negative impact on your long-term plans.
It becomes near impossible to manage your retirement portfolio correctly if you allow anxiety and your emotions to take over. For some that means not logging into your account every day. On a daily basis, the market has historically been negative over 40% of the time (that is a lot of red numbers if you log in every day). However, if we pull back and look annually, instead of every day, the markets have been positive over 70% calendar years since 1928 (using historical S&P returns). In short-periods, the market can be even more unpredictable, but the results are more favorable when you pull the focus back to long-term.
This is one of the best ways a Financial Adviser can help in a time of need. I would recommend working with a Financial Adviser to create a process that helps you remember these 5 things to help reduce the pitfalls of emotional investing:
Establish an Investment policy and stick to it! – I recommend creating an investment policy statement for each client during a time in which your thinking is clear. If it was a good plan when you were thinking logically, you now have something to reference when your thinking is cloudy.
Establish a Long-term Financial Plan – Knowing in the short-term that markets go up and down, but historically have increased over time helps. Also, our clients can review their financial plan to give them peace of mind that projected retirement dates are still on course.
Have an Emergency Fund – Having cash to access during times of need allows for you to follow step 1 and 2 above. It can be extremely detrimental to a long-term plan to have to access long-term accounts during a drawdown in the market. Building a cushion ensures that you won’t need to do this
Dollar-cost Average – Most of you are already doing this through your retirement plan at work. Every new paycheck gives an opportunity to get in the market, thus smoothing your returns out throughout the course of the year. You never invest fully at the exact bottom this way, but you also don’t miss the market upside waiting to get in at the perfect time either.
If You Don’t Know What To Do? – If you have already gone through the first points above and you still don’t know what to do, your best bet is to probably take no additional action. Have a conversation with your Financial Adviser on the best steps to take from here. Those that didn’t make quick decisions in the past have been rewarded for their patience.
“We don’t have to be smarter than the rest, we have to be more disciplined than the rest.”
-Warren Buffett
As always, if you have any questions, or want to discuss this further, please reach out to me!
Billy Cardwell, CFP®
Billy Cardwell is the Owner of Aurora Financial Strategies, a financial advisory firm based out of Kokomo, IN. He can be reached via email at billy@billycardwell.com. Investment Advisory Services are offered through BCGM Wealth Management, LLC, a SEC registered investment adviser. This blog does not constitute advice. This is not an offer to buy or sell securities. Advisor is not licensed in all states.
