It is hard to not get emotional when the market makes big swings. A behavior coach can help you stay accountable to your commitment to stay in the market long-term no matter what. A financial planner can do the same. We get into our own heads, and sometimes need someone to talk us off the ledge.
Before you jump (and sell your stocks), take a breath and think. Revisit your written financial plan prepared by an advisor paid by the hour (fee only planner), not commissions. This kind of financial planner, called a fiduciary, is required by law to work in your best interest. Those who get commissions for selling certain investment vehicles are not!
Before you risk missing out on significant earnings down the line, here are four easy tricks to avoid investing with your emotions.
1. Work with 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.
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 developed 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.
3. Don’t Think Obsessively about Your Portfolio
There was a study done in 1979 that introduced the “loss aversion” principle. This principle describes instances where the weight of a loss is greater than the benefits of a reward.1 For many investors, this principle holds true - they feel worse about a loss in value of their stocks than glad when those stocks are performing well. If this is you, take a step back from your portfolio. While regular review and rebalancing is often necessary, resist the urge to check on your stocks 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 you could regret later.
4: Read Up on Market History
Take the time to learn on your own, even if you have an advisor. Read books and blogs, go to webinars, many of which are free. The American Association of Individual Investors has resources to help people new to the market. In time, you will build confidence in your understanding of what markets do. Taking a historical view of the market can help you separate yourself and your stocks from the greater picture. This can make your investment decisions less behavior-based as you become more informed about past trends.
In some instances, it can 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.
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This content is developed from sources believed to be providing accurate information and provided by Kelly Financial Planning. 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.