As a Wealth Manager, I have seen many investors make emotional investment decisions that end up costing them in the long run. It’s natural to feel emotional about your investments because it’s your hard-earned money on the line. However, when it comes to investing, emotions can often lead to bad decisions.
One of the most common mistakes that investors make is selling when the market is down. When the market drops, fear takes over and investors often panic. They sell their investments at a loss, hoping to avoid further losses. Unfortunately, this can be a costly mistake. By selling when the market is down, investors turn paper losses into real losses. If they had stayed invested, they would have likely recovered their losses when the market rebounded.
Investors who make investment decisions based on their emotions often find themselves selling low and buying high. This is because they tend to buy when the market is doing well and sell when it’s doing poorly. This is the opposite of what they should be doing. They should be buying when the market is down and selling when their investments are expensive. This is how they can make money in the long run.
It’s important to understand that the stock market is like a roller coaster ride. It has its ups and downs. However, over long periods of time (10 years and longer), the market has generally gone up. This means that if you stay invested, you will likely make money in the long run.
Investors who are afraid of the stock market should consider investing in a mix of assets that they are comfortable holding in any market condition. This could include a mix of shares, bonds, and cash. This way, investors can stay invested in the market while also minimizing their risk.
It’s important not to be too conservative with your investments. Many investors make the mistake of switching to conservative assets because they are getting close to retirement. However, retirement is not the end of your investment time horizon. You will likely need your investments to last for 30 years or more. This means that you should be invested appropriately for that time frame.
One way to avoid making emotional investment decisions is to have a solid investment plan in place. Your investment plan should take into account your financial goals, risk tolerance, and investment time horizon. It should also be diversified across different asset classes and countries to minimize risk.
Once you have an investment plan in place, you should stick to it. This means not making any emotional investment decisions. Instead, you should regularly review your investment plan and make any necessary adjustments. This could include rebalancing your portfolio or changing your asset allocation.
In conclusion, allowing your emotions to drive your investment decisions can be costly. It’s important to stay invested in the market and avoid making any emotional investment decisions. Investors should consider investing in a mix of assets that they are comfortable holding in any market condition. They should also have a solid investment plan in place and stick to it.
Written by Warren Ingram
CFP®, Wealth Manager, public speaker and author. Host of the HonestMoney podcast. FPI South Africa Financial Planner of the Year 2011.