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 economy and stock markets, your first instinct may likely be to sell your shares to hide in cash on the sidelines. Yes, your stock portion in 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 stock investments now based on an emotional response could mean you miss out on significant earnings years or decades later down the line. Before you risk that chance, we have four easy tricks you can use to help avoid investing with your emotions.
Trick 1: Find a Behavior Coach
Working with an advisor 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 that an extra set of eyes on your portfolio to be worth it.
A large part of our client experience at MB&Co. is behavioral coaching when client portfolios are loosing value with the stock market. We take a long term investment approach with all of our client portfolios no matter what part of your life-cycle you are in. We customize all investment portfolios so that clients can stay invested when an ugly bull market emerges like it has the past few weeks.
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 piece 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.
All MB&Co. clients have their investment plan and greater financial plan accessible to them through an online client portal. This allows our clients to have 24/7 access to their plans to help give them peace of mind at all times. In addition to having access to the plan, we as your advisors have the same access and can make any changes needed to make sure that your plan is always up-to-date.
Trick 3: Forget About Your Portfolio… For a Bit
There was a study conducted in 1979 that introduced the “loss aversion” principle. This principle is used to describe instances where the weight of a loss is greater than the benefits of a reward.1 For many investors, this principle can hold true - they feel much worse about a loss in value of their investment portfolio than they feel happy when that portfolio is performing well. If this sounds like you, it might be time to take a step back from your investments. While regular review and rebalancing is often necessary, you may want to resist the urge to check on your portfolio 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: Read Up On Market History
Depending on your depth of investment knowledge, you may already know what a bull market (on the rise) and a bear market (falling downward) are. But if you’re looking to better prepare yourself emotionally, you may want to do a bit of research into what historically happens in each market type. How long they tend to last, the trends leading up to either market type and the recovery time (in cases of loss), for example. Taking a historical view of the market can help you separate yourself and your investments from the greater picture. This has the potential to make your investment decisions less behavior-based as you become more informed about past trends.
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 comfortability with 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.