Jason Pike | September 1st, 2022
Taking The Emotion Out Of Investing
When it comes to investing, there are a number of things that can hurt our portfolio, pandemics, wars, recessions, bubbles bursting, and natural disasters, just to name a few. And as scary as those things are, the factor that can most adversely impact our portfolios is us. That’s why taking the emotion out of investing is so critical to being a successful investor.
It’s Simple But Not Always Easy
Successful investing is a lot like successful weight loss; we all know how to achieve it; diversify your portfolio, invest long-term, max out tax-advantaged accounts, buy low, and sell high. Be physically active, and eat a healthy balance of nutrient-dense foods in a calorie deficit. Simple? Yes. Easy? Not always.
The reason simple things often aren’t easy is that humans are not always rational beings. We know that broccoli is better for weight loss than chocolate cake, but sometimes we just want the cake. We know that selling during a bear market will hurt our portfolio, but when we see enough Doomsday headlines, our emotions take over, primarily fear, and we make what we know is a mistake.
Our ability to negatively impact our portfolios is so widespread that it has a name, behavioral finance. There are studies done on it, books are written about it, and the SEC even has employees who focus on it.
Behavioral finance is “a subfield of behavioral economics that proposes psychological influences and biases affect the financial behaviors of investors and financial practitioners.”
So how can we take emotions like fear and panic out of our investing decisions?
Past Performance is No Guarantee
We’ve probably all heard the quote, “Past performance is no guarantee of future results.” It’s meant as a warning; just because an investment has done well in the past doesn’t mean it will continue to do well. And that’s true. There are no guarantees in life, never mind investing.
But the market's past performance as a whole and over a long period of time, while not a guarantee, is certainly a very strong indicator of future performance.
We’re officially in a bear market, which is defined as “a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.”
And there has been plenty of “widespread pessimism” and “negative investor sentiment.” All you have to do is tune into any news show or glance at any newspaper to see it. When pessimism and negative sentiments are being blared at us 24/7, it’s no wonder we start to question what we rationally know to be the right move.
To calm our fears, let’s have a look back over a century of bull and bear markets:
- Between 1926 and 2021, the S&P 500 saw 17 bear markets
- The declines ranged from -21% to -80%
- On average, the bull markets lasted ten months
- During the same time period, there were 18 bull markets, defined as gains of at least 20% from a previous plunge
- The gains ranged from 21% to 936%
- On average, the bear markets lasted 16 months
And a bad day, week, or month doesn’t necessarily mean the entire year will be a write-off. In 2020 when the pandemic badly impacted the market, US stocks had gained 21% by the end of the year.
The next time you get spooked by a dire headline, keep that 100 years of past performance in mind!
Trust Your Plan
When you meet with a financial professional to create a plan, it’s not just your goals that are factored in. A solid financial plan accounts for and helps insulate you from a variety of factors; bear markets, recessions, and inflation, among them.
A financial plan sometimes needs minor adjustments, but they don’t need a major overhaul when those factors come into play. Trust your plan.
Tune it Out
Tune out things that might make you act with emotion. That means avoiding financial news and not constantly checking in on your investments. You already know that things are probably down, so there’s no reason to check how far down day after day obsessively. You’re investing for the long-term, so what your portfolio looks like today, tomorrow, or a month from now doesn’t matter to your long-term plan.
Look for Opportunity
When we’re in a bear market, the best advice is often to do nothing. But that primarily means don’t panic and sell. A bear market can be a great opportunity to buy shares in a previously unaffordable company.
Dollar-cost averaging is a helpful strategy when trying to avoid allowing emotion to control investing decisions, whether in a bear or bull market. DCA means investing equal amounts of money on a regular schedule. It will enable you to buy more shares when prices are low and fewer when prices are high.
Get a Second Opinion
If you’re considering making an investing or another type of financial decision that you think may be driven by emotion and possibly a mistake, consult your financial advisor. That's what we’re here for! We can help calm your fears and remind you of how we crafted your long-term financial plan to see you through a volatile market.
*Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.