View transcript for Three Emotional Investing Mistakes and How to Avoid Them video.
While market volatility and investment performance can affect your success toward your important long-term goals, your own emotions can become the biggest roadblock. Here are three mistakes people often make when their emotions get in the way of their investment strategy – and how you can avoid them.
Mistake #1: Heading to or staying on the sidelines
Too often investors are tempted to head to the sidelines when the news looks bad. Whether it’s the economy, tariff or trade war concerns, or market fluctuations, there is no shortage of headlines that could distract you from your long-term goals.
Some investors try to avoid potential stock market declines by selling investments and moving to cash. But in order to time the market successfully, you have to get two decisions right: when to get out, and when to get back in. Getting one right is difficult, and getting two right is nearly impossible.
Other investors may hold too much in cash, thinking they are avoiding risk. But this could actually increase the risk of not having enough growth in their portfolio to meet their goals or outpace inflation.
What to do instead
When negative events occur, the media often use extreme language or highlight low periods in the past for dramatic effect. The key is, do these ever-changing headlines really affect your long-term goals? Investors have successfully navigated tough periods in the markets before. You’re better off focusing on your long-term goals and not the latest headline.
Mistake #2: Chasing performance
When the media hype the latest “hot” investment or highlight “dramatic” declines in the market, investors are often tempted to chase the winners and sell the losers. But this emotional response can lead to buying investments at market peaks and selling them at the bottoms – a recipe for underperformance.
What to do instead
Instead of trying to find the next hot investment, you should stay invested in a diversified portfolio specifically tailored to your situation and long-term goals.
Also, be sure you understand the purpose of your investments. For example, if you’re retired, some investments provide income today, while others help provide income down the road. But each serves a critical role in ensuring your money lasts as long as you need it.
Since each one serves a different role, each may be outperforming and underperforming at different times. While diversification cannot guarantee a profit or protect against loss in a declining market, it can help smooth out market ups and downs, so don’t chase performance.
Mistake #3: Focusing on the short term
While it’s important to look at the long term, day-to-day fluctuations can obscure your view of success. For example, in 2008, some investors sold off after their portfolios fell from all-time highs. But if they had looked at their long-term performance instead, they may still have been on track toward their important long-term goals.
What to do instead
While market declines can be unpleasant, they’re in fact a normal part of investing. In fact, on average, the stock market has a decline of 10% about once a year. Your measurement of success should be your progress toward your long-term goals rather than any day-to-day fluctuations.
A short-term market decline or the latest media headline doesn’t change your long-term goals. It helps if you can review your goals and objectives, recognize behaviors that could cause trouble, and as always, work with your advisor to help you focus on your progress toward your goals and avoid making emotional investment decisions.
This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.