You might not realise it, but your emotions play a part in every decision you make.
Usually, this doesn’t matter and, in many instances, listening to your emotions can lead to better outcomes.
This isn’t the case when it comes to investing. Emotional investing results in knee-jerk reactions which can knock thousands of pounds off your portfolio’s value.
Fear and greed are the two most common emotions that investors experience. When stock markets are falling, investors sell their shares in a panic and end up locking in losses. And when markets are rising, investors pile money into shares only for them to come crashing down weeks or months later.
Read on to find out how to stop your emotions harming your investments.
1. Stay focused on your long-term goals
When you’re investing, it’s important to look at the bigger picture and remain focused on your long-term goals.
Usually, crashes and spikes in the stock market are short-term occurrences. If you make decisions based on these short-term events, it could hinder your ability to reach your financial goals.
If you’ve ever made an investment because everyone else was doing so, or sold stocks because everyone else was panic selling, you may be suffering from a cognitive bias known as ‘herd mentality’.
It’s human instinct to follow the herd but, unfortunately, it can cause a lot of heartache. In the late 1990s, investors poured money into the dot-com sector because no one wanted to miss out on the next big thing. When the bubble burst, they were left nursing large losses.
Similarly, when the stock markets started falling in March 2020, investors sold their shares in droves and then missed out on subsequent gains.
Sticking to your long-term plan and resisting the urge to follow the herd is crucial to successful investing.
2. Block out the noise
The constant barrage of market-related news makes it difficult to stay calm and rational. Yet it’s really important to try to block out the noise.
The problem is it’s almost impossible to assess market news objectively. Humans want to be right and so typically give more weight to information that supports their beliefs and less weight to information that disproves their beliefs. This is known as ‘confirmation bias’.
If you’re convinced a particular investment is going to perform well, you’ll probably pay close to attention to information supporting your opinion, and disregard anything that casts doubt over its future. On the flip side, if you firmly believe an investment is on a downward trajectory, you might seek out negative stories and ignore the more positive evidence.
Some people avoid confirmation bias by actively searching for information that disproves their beliefs. This isn’t easy. Unless you’re able to form a balanced and objective opinion, it’s better to just drown out the noise.
3. Maintain a diversified portfolio
Maintaining a diversified portfolio is crucial regardless of what’s happening in the wider market.
Spreading your money across a range of assets can reduce the impact of one asset falling in value. How you split money between assets will depend on several factors, including how long you’re investing for and your capacity for risk.
In uncertain times, many investors switch from shares to cash because they’re fearful of making a loss. If your fear is so great that you don’t want to take on investment risk, you’re suffering from ‘loss aversion’. By switching to cash, there’s a risk your money will grow at a slower rate than inflation. You could end up falling short of your financial and retirement goals.
Equally, if markets are rising and you invest more of your money in shares, your portfolio could end up being too risky for your individual needs. The way you invest your money should always be in line with your needs, goals, and attitude to investment risk.
By maintaining a diversified portfolio, you’re more likely to grow your money while protecting yourself from major losses.
4. Speak to a financial planner
A financial planner does a lot more than manage your money. They can act as a behavioural coach to help you through challenging times. This can help you to stop your emotions getting the better of you.
A financial planner will create a personalised financial plan with the right asset allocation for your needs and goals. They’ll carry out regular checks to ensure your goals are on track.
By speaking to a financial planner, you’re more likely to invest objectively, maintain a diversified portfolio, and stay focused on the big picture.
Get in touch
At Ardent, we can help you avoid emotional investing by acting as your sounding board during uncertain times. We’ll assess your current situation, find out what goals you want to reach, and create a personalised plan that sets you on a solid path to achieving your aspirations.
To find out more, email email@example.com or call 01904 655330.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.