Investing your money in an ever-changing market can conjure up a lot of emotions. From the euphoria of the highs to the disappointment that can accompany the lows, investing can often feel like a battle between the head and heart, with your hard-earned dollars at stake. And for some people it can be difficult to ignore emotional pulls, like a gut feeling to buy the hot stock of the day or sell when the market is experiencing volatility.
Those emotions can lead to knee-jerk reactions instead of thoughtful decisions that align with your investment strategy. Consider this: Between 1997 and 2016, average stock market investors earned only 3.98% returns annually, compared to the S&P 500 index’s 10.16% annual returns. Why? Investors allowed their emotions to drive their investment strategy, which often meant buying high and selling low.
But how do you avoid emotional investing?
It’s not uncommon to act on emotions — whether they’re based on media hype when the market is on the rise or internal distress when it appears to plummet. The thing is, the market’s peaks and valleys typically don’t last — and responding to them (especially without understanding why they occur), more often than not, can cause you to lose a portion of your investment or miss out on future gains.
It takes a conscious effort to steer clear of emotional investing, and understanding the concept of behavioral finance (which encompasses the emotional side of investing) is the first step in separating the two. Then, by setting solid goals with the right strategies in place, you can make rational and reasonable investment decisions, free from anxiety, fear, and FOMO. (That’s fear of missing out, for you acronym novices out there.)
Take a look below at how emotional investing can be, then read on to learn how to make smart investing moves that aren’t fueled by your emotions.
Set investment goals.
What do you want to achieve financially?
Having an answer is a critical first step to investing. Maybe you’re 30 years old and saving for your child’s education or 50 and saving for retirement. Or perhaps you’re 25 and trying to grow your personal wealth. Whatever your long-term goals may be, determining them early on (and writing them down so you can reference them later) will help you define your investment time horizon, risk tolerance, and overall investment plan.
A long-term financial vision serves as a guidepost for both your immediate trading decisions and those that may stretch decades into the future — and without one, you’re much more likely to fall victim to the short-term appeal of emotional investing.
Familiarize yourself with market trends.
Remember that little saying “history repeats itself?” It often holds true, and the stock market is no exception. We’re not saying you need to go back to college or thoroughly study a 100-year history of the Dow Jones, but having a little background knowledge on the market cycles and trends (like bubbles, bull, and bear markets) and what they look like certainly doesn’t hurt.
Understanding economic cycles and the ebb and flow of market tides can help ease the overexcitement or fear you may experience when the market takes a turn. And once you’ve gotten familiar with historical trends, you’ll want to be in tune with more current ones, too. Speaking of which …
Use the media as a tool, not a financial advisor.
It’s easy to get caught up in media hype, whether it’s good or bad, especially because the news can be sensationalized. But making investment decisions based on the day’s news is an emotional gut response that typically doesn’t take in factors like longer-term trends or other business and economic context.
The news is a great way to stay informed, but headlines shouldn’t determine your investment strategy. Take the time to put daily happenings into context and use them as one data point in the larger scheme of market trends and investment opportunities.
Ditch the herd mentality.
Everyone feels the fear of missing out (FOMO) sometimes. It’s why you go out with your friends when you’d rather be in bed or watch a popular movie even though you don’t really care for its genre. And FOMO plays out in finance too, due to the herd instinct.
When you see tons of others doing something, like buying Bitcoin for example, you tend to want to follow along and make the same (or similar) investment moves. When you do this, you’re skirting the decision-making process and making choices based on societal perception, rather than your own research. But that can often work against you. By the time most investors have joined the herd, the potential for making significant gains has already passed.
Diversify your portfolio.
When you have a diversified portfolio, you spread your holdings across different asset classes (like stocks, bonds, funds, real estate, etc) or invest across industries or geographies. Asset allocation not only manages risk, it eases the emotions that can spring up during times of market volatility. Because markets move in different directions at different times, a diversified portfolio balances investments that aren’t performing so well with those seeing positive results.
With the increased protection against a market downturn, you don’t feel the sting of losses as harshly, which can boost overall peace of mind. And increased confidence in your portfolio means less chance you’ll want to sell when times get tough — reducing the odds you’ll succumb to emotional investing.
Enlist the help of a Robo Advisor.
Sitting tight in a volatile market can be tough, but what can be even more difficult? Entering in the first place. Whether you’re a novice investor with little-to-no experience or you want to diversify your portfolio, it’s not uncommon to get caught in the trap of behavioral investing or to let risk aversion steer you to under-invest. That’s where a robo advisor, like our cash-enhanced Managed Portfolio, can help.
With no advisory fees and a built-in cash buffer, investors at any level can feel confident in their investments, whether the market’s facing a rocky road or smooth sailing. Because the cash buffer eases the effects of market fluctuations, the emotional toll triggered by highs and lows feels less extreme — making it easier to stay the course.
This low-cost, low-minimum investment option allows you to reap the benefits of a professionally-managed portfolio, while lowering the usual anxiety associated with investing your hard-earned money.
It can be difficult to separate your feelings from your portfolio. With market understanding, historical insight, a diversified investment portfolio, and a low-barrier-to-entry path to investing, you can overcome the emotional barriers that prevent you from accomplishing your financial goals.
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