As the market goes through its cycle, an investor can go through many emotions—everything from optimism and euphoria to fear and despondency to hope and relief. Experts study emotional investing because many people cause harm to their portfolios by making investment decisions based on their emotions. Think of all those who reacted fearfully to the 2008 market crash and moved their money into cash; they missed out on the subsequent upswing.
Fear and euphoria
When acted upon, fear and euphoria are arguably the two emotions that can be most harmful to a portfolio. Investors want to follow the investment principle of buying low, selling high. But when markets rise, euphoria can entice investors to jump into the already-heated market, therefore buying high. And when markets suffer a downturn, fear often leads investors to redeem, therefore selling low.
These temptations are natural. The important thing is not to give in to them. Thankfully, there’s a simple remedy to prevent our emotions from getting the best of us.
Follow this prescription
Making regular investments in a professionally managed portfolio can help you stick to a disciplined approach, thus avoiding any emotional pull that entices you to try timing the market.
This strategy prevents the bad habit of chasing hot securities or funds—a habit that can throw off your asset allocation, which negatively affects your level of risk and portfolio diversification. Trying to catch a quick short-term gain may end up detracting from long-term performance.
Do you ever feel like straying from your regular investment routine when markets rise or become volatile? First, talk to your advisor about it. They can make sure you’re comfortable with your personal investment program.