How to manage your emotions while investing

Are you new to investing? Or are you a seasoned investing professional? Either way, you’re sure to feel a range of emotions — and you’re not alone. Learn what to expect when investing and how to keep focused on the long-term gains.

Along with the incredible excitement of growing our personal wealth, three key emotions plague us when we invest: Fear, Hope and Greed.

These days, information flows at unprecedented speeds, and as investors we can feel pressured to make split-second decisions that can have a significant impact on our financial future. Markets go up…markets go down, and along the way it feels like our emotions are on a never-ending roller coaster ride.

As difficult as it might seem, there is one piece of advice that Daniel Crosby, a behavioural finance expert and Executive Director of The Center for Outcomes at Brinker Capital, has to offer: Try not to look at the markets and your portfolio daily.

A daily look at portfolio values means you see a loss 46.7% of the time, whereas a yearly look shows a loss merely 27.6% of the time,” Crosby explains.

By only viewing your portfolio a limited amount of time, you’ll have “increased feelings of security and improved decision-making.”

Independent financial community expert organization, Dalbar, recently released its 2018 report on investor behaviour, citing several factors that can go into someone making a poor investment decision.

Investor behaviour is not simply buying and selling at the wrong time, it is the psychological traps, triggers and misconceptions that cause investors to act irrationally. That irrationality leads to buying and selling at the wrong time, which leads to underperformance,” according to the report.

Keeping these behaviours in mind, here’s how to manage the three key feelings to maximize your emotional investing potential.

1. Fear

“Mortgage CRISIS,” “Bank COLLAPSE”, “Government BAILOUT.”

These were just some of the headlines in the fall of 2008. When these messages overtake the airwaves, fear can naturally take over as you open your statement and see that the value has decreased. You start to question your financial future and your personal dreams — whether it be retirement by a certain age, a family vacation or a new home.

Overcome Fear:

Get in control of your investments and trust your strategy.

To start, review the formula that you put in place with your investment advisor when looking at your asset allocation. What percent did you invest in stocks versus bonds? Are you comfortable with your level of risk and the timelines you’ve set in place to see a return? It might be time to rebalance your portfolio.

For example, if your stocks make up a higher percentage of your portfolio compared to your bonds (or vice versa), then you could sell the higher performers and bring the portfolio back inline. By balancing your portfolio, you’ll get in control of your investments, feel more aware of your current situation, and be able to reset your plan for future investments. Knowledge beats fear.

2. Hope

Don’t fall in love with an investment — it won’t love you back.

This is the sad reality, however far too many investors refuse to sell an investment that they purchased because they paid a certain amount for it, and are waiting for it to “come back to that amount.”

Holding on to hope can also mean that an investment slowly dwindles away while you wait. Allowing your emotions to overshadow your logic can block your ability to see the fundamentals of the investment.

Overcoming Hope:

We all make bad investments at some stage in our portfolios. What sets great investors apart from others is learning to accept this fact and moving on at the right time. “Hope,” and the ability to let go, truly tests our ability to become a successful investor.

3. Greed

When the markets are doing well, we have a natural tendency to want more of a good thing. Investors look at their portfolios and want to shift money from the investments that are underperforming and put all of their money into the investments that keep appreciating in value.

However, this strategy could backfire since you may inadvertently take on more risk in your portfolio than you can afford. In Dalbar’s recent report, the organization explains how these types of actions can overtake a person’s rational self.

“Irrational investor behaviour is typically triggered by some sort of stimulus. A geopolitical event, previous market experiences, news stories, or a hot tip from a colleague can distract an investor from his or her long-term goal.”

Overcoming Greed:

Just like with fear, you are best to review your asset allocation and rebalance your portfolio. Keeping a balanced perspective will help you managed emotions while investing and avoid an impulse urge to move your investments at the wrong time and without all the right information. Greed without all the right information won’t necessarily help your portfolio grow.

An Aviso Wealth Advisor at Assiniboine Credit Union can help you manage the emotional roller coaster of investing, assess your portfolio and help you establish an approach to your investments that fits your comfort level.

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Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated.

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The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.

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