How To Avoid Emotional Investment Choices

Kelly Trageser |

 

 

Investing is a marathon, not a sprint. It takes patience and confidence to stick with your investment strategy, especially during market downturns. “Buy low, sell high” seems easy enough to master but many investors often fail to follow this advice. There are ways to avoid the pitfalls of emotional investing . Here’s a collection of a few valuable points to remember.

Establish Long-Term Goals

A Certified Financial Planner (tm) professional can help you put an investment plan in place that ties in your overall long term financial goals. A financial planner will consider your risk tolerance, your age and your life goals.  He or she will design an investment plan built for your life, not just your Wednesday.

Tune Out The Short Term Noise

If you are glued to the market reports and checking your portfolio value every day, you’re playing the wrong game and most likely driving yourself crazy. Investing properly takes time and patience. It requires taking a long view and avoiding fads and trends in the market. It means tuning out the short term noise that distracts investors and often impedes their chances of reaching their financial goals. Although it is important to be informed, checking your portfolio and reading the financial news every day will cause you to lose focus on your bigger picture long-term investment strategy.

Avoid Selling Into A Storm

When markets are tumbling down, it’s tempting to throw up your hands and say “sell it all.” This strategy can be described as “buy high, sell low.”  It is also referred to as "going to cash."  Although this may provide an immediate sense of relief, it is definitely not the best approach for long-term success. It is important to work with your financial advisor to understand your risk tolerance way before one dime is invested in the financial markets. Your advisor should explain to you how your portfolio could be expected to react when markets are rising and when markets are falling. This way, there are no surprises or reasons to panic. Also important to keep in mind, whether it be a single day of bad returns, or a totally bad year, volatility is normal and to be expected. Staying invested during times of uncertainty will help you reach your financial goals.

Past Performance Is No Guarantee Of Future Returns

Before Steve Jobs came back to Apple in 1997, the company struggled to earn profits and keep their investors happy. At that time, relying on the stock’s past performance would lead you to think Apple was not a great investment opportunity. We all know how that story ended. Just take a look at how a $1000 investment in Apple in 1997 would look today. On the flip side, consider a company like Enron, the disgraced energy company that is no longer with us. Prior to their collapse, the company seemed to be unstoppable. Investors flocked to the firm as it was hailed to be one of the most innovative companies in America. By late 2001, Enron was in Federal court facing serious criminal charges. The stock tanked and people's life savings were wiped away overnight.

Don't Be Fooled By Get Rich Quick Headlines

Reading the latest investment news can be addictive. It seems like there are always new opportunities to make money quick. However, keep the expression in mind, "if it sounds too good to be true, it probably is."  Let's take the recent drop in oil prices. Just because oil dropped to below $1 doesn't mean you should jump on the band wagon to own it. There are inherent risks with owning commodities and you should work with your financial advisor to see if it would be a good fit with your investment strategy. Unfortunately, most get rich opportunities, are often too-good-to-be-true and take out many investors’ dreams along the way. Although it is important to evaluate potential opportunities, be smart and leave your well planned out investment strategy in place.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2020 Advisor Websites.