How to take the emotion out of investing
Emotions drive many of our life decisions. But once you've decided to make an investment, you need to make sure you can keep your cool through the highs and lows of the market cycle.
From panic to euphoria
As an investor, you've likely felt a range of emotions over the past year. From panic when the pandemic hit, and stock markets bottomed out. To euphoric highs when it surged again late last year. It's common for investors to get caught up in the moment. That's why you'll always see an increase in buying when the market rises and selling off when it falls. However, this is not the best long-term approach. And it's essential to be aware of the traps that can lead to poor decision-making.
Managing your emotions
As investors, we use our money to buy personal assets. You may withdraw cash from your super to fund a trip or to purchase a caravan, which makes perfect sense as this is part of what your retirement savings are for. But when it comes to deciding whether to take your capital out of a fund or sell off some of your shares, you need to be able to deal with market movements rationally and realistically. However, this is something that's often easier said than done.
Understand your emotional biases
Awareness that your emotional biases can lead to bad decisions is an excellent place to start. So, if you want to avoid panic selling or chasing futile gains, it's essential to give serious consideration to your risk tolerance. Be clear on the risks you face when making any investments. If you do this upfront, it will drive the type of investment you make, which in turn, is likely to reduce the chances of knee-jerk reactions further down the track.
Getting the timing right
At the same time, it's fair to say that there will always be something for investors to worry about. Fluctuating interest and exchange rates, rising inflation, political risks. Should you sell? Or should you hang on to your investment? Or is it a time to buy?
Trying to work out the right time to move in and out of the markets is impossible to do consistently. Even professional investors with large teams that monitor the markets 24/7 only get the decision right around 60% of the time. So, is it reasonable to expect that someone without training and experience in financial markets can deliver results better than this?
Investment strategies that can keep you calm
It's possible, of course. But you'll need to understand the markets, stay the course through short term volatility and manage your risk tolerance. The typical investor is putting hard-earned cash into investments, and the thought of losing that money can be highly stressful. Dollar-cost averaging and diversification are two popular approaches to investing that can help manage stress and keep your investments on track.
Remove the guesswork with dollar-cost averaging
A tried and tested investment method that reduces the risk of emotional investing is dollar-cost averaging. With this approach, you invest the same amount at regular intervals, say every month. This means you get more for your money when the market's low. And less when it's high. The trick is to stay the course, keep investing and let your investment grow. That way, you can keep your cool during both upward and downward trends.
Diversification and risk
Diversification is the classic financial approach to spreading risk. And buying into a whole range of investments rather than just plumping for one or two can really help reduce risk. The beauty of this method is that it's rare for markets to move in such a way that there will be losses in every sector. As a result, diversification offers you increased protection on your investment because losses in some areas will always be offset by gains in others.
Staying on track
Finance can be a highly charged topic, and it's easy to make decisions that aren't ideal. The best way to manage your finances is to create a plan and stick to it. Don't let emotion get in the way of sound decision making and securing your financial future.
The benefits of long-term investments
CPM has portfolios and an investment committee that take care of your investments for you. We don't claim to be perfect, but we establish and maintain portfolios that we believe can reduce volatility and deliver in the long-term. We do this while carefully monitoring markets and being prepared to change course when the market conditions change significantly.
by Gary Lucas.