The first month of this year has tested investors’ emotions perhaps more than at any time since the financial crisis almost eight years ago. No matter how committed you may be to staying the course with your investing strategy, it’s difficult to experience market drops like we saw in January and not feel emotional about it.
Investment decisions should be made rationally and logically, based on sound analysis and timely and accurate data — not on greed or fear. But when markets are shooting into the stratosphere, like they have been most of the past five years, or falling like a rock, like they did in January, it’s hard to take emotions completely out of the equation.
So how can you keep emotions out of your investment decisions, or at least minimize their impact on the decisions you make? Here are four suggestions:
1. Have a long-term investment plan. It all starts here. Without a comprehensive plan that details where you want to be financially at some point in the future and how you’re going to get there, you will be more vulnerable to being emotionally influenced by short-term market volatility.
Creating a plan starts with defining your financial and investment goals and gauging your level of risk tolerance. Based on these, you and your financial advisor can work together to create a diversified investment portfolio with the appropriate asset allocation for your short-, medium- and long-term goals and the amount of risk you’re comfortable taking with your assets.
2. Keep your eye on the prize. Here, the “prize” is your financial and investment goals. In other words, what do you want to do one day with the money you’ve accumulated in your investment portfolio?
For many people, their main financial goal is to accumulate enough money for a secure retirement or to pay for their children’s college educations. These are usually long-term goals that are not substantially impacted by short-term market volatility. For example, if your children are young or you have 20 or more years until you plan to retire, there’s a good chance that short-term market volatility will have little or no impact on these goals.
3. Tune out the financial and investment news. The modern media bombards us with websites and TV channels that are devoted to non-stop, 24/7 coverage of the financial and investment markets. During times of extreme market volatility, often the best thing to do is tune out all the talking heads who are offering what is often contradictory and misleading investment advice.
If following the media coverage of the markets’ ups and downs makes you even more nervous, then turn the media off. Remember: The self-proclaimed experts on that cable TV squawk box or website don’t know anything about your personal financial goals, risk tolerance or investing plan. So take what they say with a grain of salt, at best.
4. Talk to your financial advisor. On the other hand, your financial advisor knows all about your goals, risk tolerance and long-term plan. He or she is the person you should talk to first if you feel like you are about to make a financial or investment decision based on emotions rather than reason, logic and your long-term investment plan.
If you are concerned about your investment portfolio or your personal finances in light of recent market volatility, please give us a call. We would be happy to meet with you and review your portfolio within the scope of your investment goals, risk tolerance and current financial situation.