Avoiding emotional investing in 2020 and beyond
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They say it’s healthy to “get in touch with your emotions.” When it comes to investing, it’s not only healthy to understand your emotions, it’s essential if one wants to avoid the negative impact of emotional investing.
In order to maximize investment returns, it’s key to ignore ones emotional, gut reactions of fear, greed, and/or frustration … realize that the nature of the market is to have occasional volatility but to increase over time … and stick to a long-term plan. As Warren Buffett says, “If you’re emotional about investment, you’re not going to do well. You may have all these feelings about a stock, the stock has no feelings about you.”
Unfortunately, many investors don’t follow this advice.
In fact, well before 2020 and COVID-19, the average investor has been known to earn lower returns than the market, both in years when the market has declined, and when the market has done well. Why? Because that average investor follows the herd, selling when the market is on a downward trend, and buying when the market is gaining. Need proof? When the S&P 500 lost 4.38% in 2018, the average investor’s losses were more than double that – 9.42%*.
Edward Gougeon, Senior Financial Advisor, says, “Many advisors on the frontlines have dealt with clients who expect higher returns when the markets are good, and no losses when the market is down, and will frequently suggest reactive adjustments to their portfolios during volatile times, which have been shown to have a detrimental long term effect on the performance of a portfolio.”
Use these proven strategies to help you avoid emotional investing.
In times of market volatility, the emotional response is to do something, anything.
But the reality is: your best plan of action may be to do as little as possible.
Before you react to market changes emotionally, ask yourself: “Have my investment goals changed?” “Is my financial situation the same?” “Has my investment time horizon changed?”
If the answers to these questions are no, before you do anything else, make a couple of behavioural changes: pay less attention to sensational headlines, and resist checking your investments every day.
Then consider the investment strategies below:
Dollar Cost Averaging
Instead of fruitlessly trying to time the market, outsmart the market. Invest the same amount (doesn’t have to be a large amount), into the same investments at the same intervals (weekly, monthly, whatever works for you). You’ll have ‘outsmarted’ the market because you’ll have bought more when stock prices are down, and less when stock prices are up … over time, buying more at a lower price. It’s called “Dollar Cost Averaging”, and it’s easy with a Preauthorized Contribution Plan (PAC).
With a PAC, a pre-arranged amount is automatically withdrawn from your chequing account on a regular timeframe such as weekly, biweekly, semi-monthly or monthly, then deposited directly into your investment account. How much, and how often, you contribute is up to you.
Ensure your portfolio is diversified
It’s “Investing 101”: Holding a variety of different kinds of investments in your portfolio can minimize risk and smooth out the dips during times of market volatility. In turn, this could reduce an emotional response – and likelihood of kneejerk selling – when markets go down.
An Educators financial advisor can work with you to ensure your portfolio reflects your tolerance for risk.
Rebalance your portfolio
Investments will grow or decline at different rates. As a result, over time the percentage of different types of investments in your portfolio (your ‘asset allocation’) could change. To ensure your portfolio continues to meet its original objectives, it should be rebalanced to reflect its original target at least once a year.
Investing is an important way to meet your goals, so it makes sense to ensure your investment decisions are made calmly and rationally. It’s natural to experience emotions when the market is volatile…but essential to not react emotionally.
Are your emotions getting the better of you? We’re here to help.
Before you make an investment decision based on your emotions and the latest market noise—call on Educators Financial Group. Since 1975, we’ve been helping education members navigate their investment portfolios through many ups and downs. No matter where you are on the pay grid, or what your pension income is in retirement, we can provide you with sound, educator-specific advice to help ease your mind and reach your financial goals.