Whether you’re new to the stock market or a seasoned investor, it can be hard to keep your emotions in check. When you listen to the news and hear that the S & P 500 dropped 50 points, your first instinct may likely be to sell off some of your US equity funds. The trouble is when it comes to the stock market - it's important to think long term. Selling off a position 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, here are four strategies 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 will likely find value in having someone level-headed to talk with during turbulent times in the market.
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 work with a financial advisor, he or she will help make an Investment Policy Statement to meet your needs that describes your risk tolerance and the overall investment strategy. When you’ve made a proper, thoughtful investment plan, you can be 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
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 stocks than they feel happy when those 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: 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 stocks 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.