When it comes to investing, many people find it difficult to keep their emotions from swaying their decisions. It doesn’t matter if you are a long-time investor or a burgeoning young professional; the truth of the matter is that you work hard for your money, and you want to maximize your return on investment. Sticking to a long-term investment strategy can be difficult, especially if your emotions guide your decisions and blind you from seeing the big picture. Long-term investment strategies are designed to take advantage of higher-yielding– but more volatile– investment opportunities like stocks and stock funds that go through market gyrations. In a volatile market, it is natural to see a stock value drop. If you let your emotions cloud your judgment and you react too early, you can miss out on the long-term gains realized by weathering the volatility of the stock market. For this reason, keeping emotions away from investment decisions may provide you a more suitable chance of succeeding with your long-term investment plan. Here are our five tips on how to keep emotions and investing separate:
#1 Set your financial goals
The most suitable way to help keep your emotions in check and ensure that your investments are working for you is to identify and set clear financial goals. Financial goals will help guide you through investment decisions while keeping emotions out of the picture. Financial goals can generally be split into two categories; long-term goals and short-term goals. Long-term goals can be thought of as anything five or more years in the future, while short-term goals are no more than four years away. Contributing to long-term goals will require a different investment strategy compared to short-term goals. For example, if you are retirement planning and saving for thirty years from now, you know that you have more time to make up for any losses than if you plan to retire in 5 years. Therefore, it is easier to check your emotions and stay the course through the fluctuations. For short-term financial planning, it is common to place those savings in a more stable environment since you have less time to weather a volatile market. Meeting with a financial professional is a good way to identify your short and long-term goals and create an investment strategy to help reach those goals.
#2 Trust in your investment strategy
After identifying your financial goals, the next step is to develop an investment plan that works towards meeting those goals. If you are new to investing, it is often helpful to meet with a wealth or financial professional to break down the different investment strategies. Traditionally, investors will use a high-risk investment strategy for long-term investment plans. A high-risk strategy, like investing in a new startup’s stock comes with risk but has the potential to pay big dividends should it explode in value. High-risk strategies are suitable for long-term planning because you have more time to make up for any potential losses. A low-risk strategy is generally used to meet short-term plans. Low-risk options like a savings account offer virtually no risk but pay very little in return. Regardless of which you choose, it is important to trust your investment strategy and stick to it through any market changes. Checking your investment every day won’t show you the big picture; instead, all you’ll see will be market gyrations. Both the high-risk investment strategies used in long-term planning and the low-risk investment strategies used in short-term planning come with some amount of risk. Frequently checking up on your investments and reading too much into the inevitable loss will do nothing for your portfolio. All it will do is cause you anxiety.
#3 Understand what you are investing in!
Once you are done setting long-term and short-term financial goals, it is important to understand what you are investing in and know the risks associated with your investments. There are numerous approaches to investing, too many to list here, but these are some of the most popular methods.
- Buy-and-hold investing- This is a popular strategy to work towards long-term goals. Buy-and-hold strategists seek out investments that they believe will pay off in the long run. It is a high-risk strategy, and investors can’t get rattled when the market drops in the short term.
- Active investing- This is a more involved form of investment. It requires investors to trade frequently and opportunistically using past market data such as trading volume or price trends to help anticipate where market prices might go.
- Growth investing- Growth investing involves buying shares of companies that appear ready to grow at an above-average rate.
Although these are some of the most common strategies, there are many more types of investments. Regardless of which strategy you use, it is important to fully understand all aspects of your investment. Knowing what you are buying is crucial to help you avoid emotional setbacks in investing. In addition to doing your own research, it is generally a good idea to seek the help of a wealth manager or some other advisory services.
#4 Beware of trying to time the Stock Market
When put simply, making money using the stock market seems easy… Buy low and sell high. Though this is a general idea, it can be challenging to time the market correctly. A recent study from Bank of America found that a better approach might be to simply remain committed to your long-term goals. Timing the market is difficult and many investors fall into the trap of panic-selling when the markets plunge and panic-buying when the markets reach new highs. Both panic-selling and panic-buying can significantly lower returns for longer-term investors by causing them to miss the best days or invest during the worst days. Conversely, sticking to an investment strategy through the ups and downs will offer a greater return towards meeting your financial goals. Resisting the urge to panic-sell and panic-buy can be hard; it can be beneficial to talk over your investment decisions with an investment professional.
Tip #5 Bring In A Financial Professional
One of the more suitable ways to help minimize the effect your emotions have on investing is to bring in a neutral third party– like a financial professional – who can help you objectively analyze your financial situation as well as encourage you to stay on track to meet your financial goals. Not only can a financial professional help you determine your long-term goals and your short-term goals and identify an investment strategy, but they can eliminate emotions from your investing. By creating a professional buffer between you and your money, a financial professional can help hold you accountable for the things that you can control. At Benefit & Financial Strategies, we offer financial services for families and individuals in Flagstaff, AZ. We provide comprehensive planning and individualized strategies to care for your financial health. At Benefit & Financial Strategies, we operate with transparency as a guiding value. We offer you access to all of your accounts online so that you can easily see how your investments are progressing. Our goal is to support you in making your assets work for your benefit. We want you to watch your progress and stay informed.
Everyone works hard for their money, and when it comes to investing, it can be tough to keep our emotions from influencing our decisions. It can be hard to over-ride the emotions that lead to panic-selling when the stock market drops. Although it is hard to do, it is essential to overcome emotional investing. By breaking down and understanding the investment process, investors set themselves up for financial success. Setting clear financial goals will help you identify worthwhile investment strategies that will help optimize your financial needs. Once you’ve decided on a financial strategy, trust that strategy and resist the urge to play the market. Sticking with your investment plan for the long run, through market gyrations, will help grow your investment. It is often beneficial to seek an investment professional like Benefit & Financial to to act as a barrier and help you examine your situation objectively and encourage you to stay on track. With the guidance of a professional financial professional, you can hold yourself accountable for the things that you can control.