Tips to Avoid Getting Emotional About Your Investments

Whether you’re new to the stock market or a seasoned investor, it can be hard to keep your emotions in check. As you hear unsavory news about a company or fund you’ve invested in, or about the markets in general, and your investments start losing value, your first instinct may likely be to sell your investments so you don't lose anymore. Yes, the value of your investments may drop in the following days or weeks, but when it comes to the stock market - it’s important to think long-term. Selling your investments  now based on an emotional response could mean you miss out on significant earnings later down the line as the market recovers and you try to figure out when to jump back in. Before you risk that chance, take a look at these four tips to avoiding investing with your emotions.

Find a Behavior Coach

Working with an advisor can be your first line of defense against behavioral investing. Some investment advisors or financial planners have behavioral finance training (including Escient Financial) and may act as a behavior coach. In doing so, they can prepare you ahead of time to react calmly and unemotionally in times of market change. If you do tend to take an emotional approach to your investment decisions, you may find that an extra set of eyes on your portfolio to be worth it.

Put Your Plan In Writing

Do you have a favorite chocolate chip cookie recipe? You’ve made it so many times, the recipe is practically etched into your head. But let’s say you go to make them, and you get a bit distracted. With your focus astray, you may start to question what you thought you definitely knew. Was it ¾ cup of sugar or a half? I swear I bake these at 375 degrees, but now I can’t remember for how long. Before you begin to panic, you can grab the cookbook and double-check the recipe. Within minutes, you have total peace of mind that you added the right amount of sugar and set the oven correctly. 

Think of your investments in the same vein. Putting your investment plan in writing can provide you with that same reassurance when doubts arise and your emotions begin to take over. If you’ve made a proper, thoughtful investment plan, you have likely already prepared for the good and the bad. Seeing this in writing can provide the relief that you’re doing the right thing.

Forget About Your Portfolio… For a Bit

There was a study conducted in 1979 that introduced the “loss aversion” principle. This principle is used to describe instances where the weight of a loss is greater than the benefits of a reward. For many investors, this principle can hold true. They feel much worse about a loss in value of their stocks than they feel happy when those stocks are performing well. If this sounds like you, it might be time to take a step back from your portfolio. While regular reviews and rebalancing is often necessary, you may want to resist the urge to check on your stocks too frequently (daily, weekly, or even monthly). With the loss aversion principle in mind, doing so may lead to more frustration than elation. This could easily entice you to make an emotionally-driven decision regarding your investments.

Read Up On Market History

Depending on your depth of investment knowledge, you may already know what a bull market (on the rise) and a bear market (falling downward) are. If you’re looking to better prepare yourself emotionally, you may want to do a bit of research into what historically happens in each market type. As an example, how long bull markets and bear markets tend to last, the trends leading up to either market type, and the recovery time (in cases of loss). Taking a historical view of the market can help you separate yourself and your stocks from the greater picture. This has the potential to make your investment decisions less behavior-based as you become more informed about past trends.

Removing your emotions from your investments is important to staying on target with your goals. In some instances it can actually be beneficial to take think about and understand of how market changes make you feel. For example, your comfort with a market downturn can help you understand whether or not your risk tolerance is at the appropriate level. But as you tune in to the nightly news or read about your favorite company online, remember to step back and think about your portfolio’s big picture. Doing so could save you from missing out on major investment wins later down the line.

Of course, this is all easier said than done. That's why it's a good idea to enlist a professional to help you understand the markets and your actual risk tolerance, and then to advise you and help you manage your investments so you're making the right choices. Escient Financial is here to provide that service, so go ahead and...