How to Overcome the Emotions of Investing

DEWITT, Mich. - Nov. 5, 2020 - PRLog -- No one can control the stock market or exactly how an investment will perform. And that lack of control can lead to making poor or emotional investing decisions – like chasing performance, not diversifying, or moving out of the market.

While these reactions can be triggered by a desire to avoid risks, the results of these behaviors can pose the greatest risk of all -- not reaching your long-term goals.

Here are some common emotional investing behaviors that may derail your journey to reaching your long-term goals.

1. Heading to (or staying on) the sidelines

We've all seen the headlines: the economy's slow recovery, the government's budget deficit, market fluctuations. Prompted by what they perceive as bad news, some investors may try to "time the market" or sell investments just because of what they hear in the news – to move to the sidelines and wait until things get better.

2. How to stay in the game

Keep your focus on your long-term goals rather than on the ever-changing headlines, which could focus too much on the negative for dramatic effect.

3. Chasing performance

When the media raves about the latest "hot" investment or highlights "dramatic" declines in the market, some investors are tempted to chase the winners and sell the losers. This type of emotional response could be a recipe for underperformance because it results in buying high and selling low.

4. How to stay diversified

Having a diversified set of investments is more important than trying to find the next "hot" investment. When you have a portfolio made up of a variety of quality asset classes and investment types, success isn't tied to one company or one type of investment. Diversification can help smooth out the ups and downs of the markets, providing the potential for a better long-term experience.

5. Focusing on the short term

Day-to-day fluctuations in an investment's value may tempt some investors away from their long-term strategy. For example, some investors sold out in 2008 because their portfolio had fallen from an all-time high, even though their performance may still have been on track to meet their goals and well above where they initially started.

6. Setting realistic expectations

It's important to measure performance as progress toward your long-term goals, not in day-to-day fluctuations. Your financial advisor can help you answer the question, "How am I doing?" and help provide the discipline you'll need to stick with your long-term strategy.

How we can help
So when you feel your emotions beginning to get the better of you, take a "timeout" and work with your financial advisor to review your goals before making what could be an emotional investing decision.