Mitigating Emotions when Investing

October 21st, 2020 post featured image

Making decisions when we are clouded with emotions – good or bad – tend to result in regret.

Investment decisions are no different.

When it comes to our finances and investments, each of us can be swayed by emotion-based reactions or the influence of non level-headed thinking. The advertising professionals know this about us as do the companies who set up their retail check-outs with the appropriately called ‘impulse items’ that often engage us on an emotional level.

The global financial markets are not human. However, from the outside, the impact of world events and uncertainty can often appear like an emotional reaction in how the markets behave. What appears to be emotional to those of us uneducated in the complicated workings of global financial markets are actually reactions based on a number of inter-acting elements.

Unfortunately, the headline grabbing behaviour of the financial markets elicits emotions from us as investors. Often the market reactions can push us to want to make emotional decisions about our investments at the very time when level headedness should prevail. In moments like these, having a well thought out financial plan and working with a financial advisor will help you navigate the options and mitigate decisions made from emotional reactions.

The best tool to utilize in keeping your emotions in check is a financial plan built by your advisor to plan for your short- and long-term goals. A plan will ease your worries about your financial future and also provide a clear path to achieving your goals. Both of these benefits will help you avoid making emotional decisions.

There are two primary strategies a financial advisor will propose in building your portfolio to help your investments weather long-term market trends and reacting to short-term emotional influences. Dollar cost averaging and buy and hold are tried and true strategies with proven effectiveness for long-term investing and keeping emotions in check when it comes to our finances.

Dollar cost averaging uses the advantages of routine to help you with your long-term investment strategy. Systematic routine deposits will allow your money to be invested regardless of what the market is doing. If the market is lower you will be able to purchase more and if the market is up your funds will purchase less. This will work in your favour over time, averaging your investment purchases while adding the inherent advantage of compound interest and a regular investment routine.

Buy and hold as a strategy is used to help with long-term investments. Once your financial plan is developed and your investment has been made, buy and hold means your investment should be in the market for the long-term. This allows compound interest and the long-term returns of the markets to work for you. Buying and holding supported by regular review with your advisor also removes the emotional desire for us to react and lock-in negative returns on our investments. Your advisor knows even the most seasoned stockbroker is unable to time the markets routinely and successfully to their benefit, making buy and hold a safe approach for long-term investments.

Daily rises and falls vary but ultimately are part of the life of the market. Buy and hold teaches us timing the market is nearly impossible and avoiding cashing in investments while the market is low requires investors to manage emotions and commit to the financial plan.

Both of these strategies require investors to let logical, methodical and habitual routines take the lead over emotion. A financial advisor will work with you to build and regularly review your financial plan to make timing the market unnecessary and fighting the urge to react to your emotions easier.

Global markets are made up of individuals and organizations with people who do their best to keep emotion out of their actions. The markets’ daily activity is based on global events, various countries’ economies, the publicly traded companies making up the markets and a variety of other factors. 2020 saw some dips and rebounds as the impacts of COVID-19 on economies around the world became apparent. The market will likely continue to reflect uncertainties as the US election and global COVID-19 recoveries play out over the next few months.

One of the top benefits of working with a financial advisor is using their level-headedness to our advantage as an investor. Connect with us to put the professional skills of one of our financial advisors to work for you.