When money is on the line, it’s particularly difficult for people to be patient and not get emotional about their investments. In some cases, financial stress leads to runaway emotions. The problem with runaway emotions is they tend to force people into making rash investment decisions. That hardly ever turns out well in an unpredictable economy.
At a time when the U.S. economy is teetering because of the Covid-19 pandemic, keeping one’s outlook in check has become difficult. After throwing in high unemployment and a shrinking market for jobs, it’s simply amazing more people aren’t coming off their emotional rails. Hopefully, things don’t get worse before they start getting better.
Since the start of the Covid-19 pandemic, we have witnessed record unemployment numbers and a temporary crash of the stock market. While that might sound alarming, it’s noteworthy that both events were temporary in nature. The unemployment rate is back below double digits and the stock market recently hit all-time highs.
Unfortunately, all of the related volatile activity caused a lot of Americans to get emotional about their investments. By the time Congress was able to intervene, a lot of people had lost a large portion of their investment portfolios. Had they been able to remain calm, they could have been spared the tragedy of losing money.
Learning to Control Your Emotions as an Investor
If you have been able to invest your money over the years, you likely did so to grow your wealth and start saving for retirement. The last thing you ever want to see is your investment portfolio shrinking. However, there aren’t many types of investments that don’t go through ups and downs.
Real estate, stocks, precious metals, and cryptocurrencies all act in cycles. For the most part, they grow in value over a longer period. However, there are times when technical and fundamental factors will lead investment to decrease in value over the short-term. What matters the most is how you react as an investor when things are headed the wrong way.
Remember, Congress will not always be there to intervene over the economy and the jobs market. Some investments have to correct to gain enough momentum to continue heading higher. BTW: You could invest in CD’s and bonds to avoid risk and stress. The tradeoff is your “Return on Investment (ROI)” would be so small, it would take decades to improve your wealth.
Keeping all of this in mind, we would like to offer you the following five tips on how to avoid getting emotional over investments.
1. Diversify Your Investment Portfolio
How many times in your life has someone told you “don’t put all your eggs in one basket?” Likely, it’s been more than a few times. This is advice that works very well for someone who chooses to invest their money.
As we mentioned above, all investments go through ups and downs. While that’s true, rarely do they all go up and down at the same time. Think about the following example.
Example: When inflation hits, interest rates usually follow suit. That tends to cause stock and real estate prices to head down. At the same time, precious metals tend to go up in value as a hedge against inflation.
If you put all your investment eggs in stock or real estate, your risk goes way up in an inflationary environment. You can avoid that from happening by diversifying your portfolio with a good balance of investments that tends to grow together at a steady rate over time.
2. Understand the Risks/Rewards of Every Investment You Make
Every type of investment comes with some level of risk. If you put money in a savings account, the risk comes if interest rates drop into negative territory. If that were to happen, the bank would charge you for keeping your money. While that might seem unlikely to happen, it shows that no investment is completely safe.
You are less likely to get emotional about sudden changes in valuation if you understand upfront the risks you are facing. The secret is to accept the risks and allow time to resolve financial issues.
3. Set Realistic Investment Goals
We all tend to shoot for the stars as investors. There’s a part of us that wants to believe the stock market is going to increase by 30% every year. Of course, that rarely if ever happens. Unfortunately, people sometimes fall into the trap of planning for amazing events that will make them rich.
As you set your investment goals, you should focus on using numbers that have historical relevance. For instance, the stock market generally appreciates 6% to 8% a year over any 10-year historical period. It’s been that way for decades. If you aim for realistic growth patterns, you will be less likely to react to temporary corrections.
4. Avoid Constant Monitoring of Investments
The only reason on earth that you should be constantly monitoring your investment portfolio is if you are day trading stocks. Don’t do that.
If you make sound investment decisions, you need to give those investments time to grow. Checking investment progress every day is not going to help. What it will do is turn you into a “nervous Nellie” every time one of your investments takes a hit.
BTW: It’s okay to sell any investment that’s underperforming as long as you have a plan to move the money to something with better prospects.
5. Hire a Professional Investment Advisor
If you don’t feel able to stop yourself from getting emotional about investments, it’s perfectly okay to hire a financial advisor. As professional investors, they certainly have enough experience to know when changes need to be made. They also have enough distance from the investments to look at things without emotion and passion.
As long as you are willing to put your trust in a professional, you will be in a better position to avoid stressing out over sudden changes.
