Don’t let emotions rule your investment plan
Canada Life - Sep 27, 2023
There are several strategies you can use to take the emotion out of your investing
In times of market uncertainty, it can be hard to avoid making emotional decisions regarding your investments. When you invest, two things are certain:
- Markets will fluctuate
- Investing involves risks
Although markets will dip, they also tend to recover – and you want to be there when they do. I can help you develop a solid plan and stick to it over the long term, helping you can take some of the emotions out of investing.
How to avoid emotional decisions
An investment plan can help you make financial choices without giving into excitement or panic. A plan can help you address risks, letting you focus on long-term growth.
Emotional investing happens when you let your emotions, like excitement or fear, take over, instead of sticking to your long-term goals. I can help you create a solid investment plan to help you make more rational investment decisions.
You’ve likely heard the advice, “buy low and sell high”. When a stock performs well, some investors, in their excitement, buy it despite the stock’s high price. But when the price drops, these same investors may panic and sell at a lower price. This – the opposite of buy low and sell high – is an example of emotional investing.
To determine how much risk you’re comfortable with, we’ll look at your risk tolerance and your risk capacity. Risk tolerance is how much you want to think or worry about your investments. Risk capacity is your ability to survive a financial loss if the market drops.
Let’s look at some strategies to help you take emotions out of your investing.
With dollar-cost averaging, you invest the same amount of money on a regular schedule. For example, you might decide to contribute $50 every other week.
By making regular contributions, you’re investing at different points in the market cycle. When markets are on their way up, your contributions are getting you returns, and since you’re investing a fixed dollar amount, you’re purchasing fewer units when prices are higher. When markets are on their way down, you’re purchasing more shares at lower prices. With dollar-cost averaging, you may end up buying low and selling high.
Instead of investing only once or twice a year, dollar-cost averaging helps you invest through all stages of the market cycle. This neutralizes short-term volatility. When you stay the course, you’re setting yourself up for the potential for higher long-term returns.
Diversification is more than picking different stocks and bonds. Diversifying your portfolio can also help take emotions out of investing. You can think of diversification in two ways:
- By investment type or what you’re invested in and where. One way to diversify your portfolio is to hold different types of investments like stocks, bonds, mortgages, real estate and cash. Another way is to invest in different industries, sectors and regions. When you do this, you avoid concentrating all your money, and risk, in one type of investment.
- By asset allocation or how you divide your portfolio across different investment types. Traditionally, financial portfolios are divided into three main categories: equities, fixed income (which includes bonds) and cash.
- Equities generally consist of stocks in publicly held companies. Equities have the potential to offer greater returns and greater risk because the stock market, where equities are traded, can fluctuate.
- Fixed-income investments offer less growth, but they’re generally more stable. Government or high-quality corporate bonds can be especially stable.
- Cash or cash-like instruments, such as term deposits, offer limited but guaranteed growth. Cash can be a safe way to park money if you’re nearing retirement or have shorter-term goals, like saving to buy a house.
By mixing asset allocation types in your portfolio, you could help increase your returns and lower the effects of market volatility.
The good news is you don’t have to do this alone. I can help you:
- Understand how current market conditions affect your investments.
- Review your short- and long-term goals and discuss to determine if you should make any changes to your investment portfolio to stay on track.
- Build a balanced portfolio of investments to help lower the impact of market volatility.
Financial markets can fluctuate daily, but, over time, they usually recover. An investment plan focused on long-term growth can help you react less emotionally to short-term market changes.