LexION Blog

How to Prevent Emotional Investing: 3 Pointers

The good news is that one of the biggest determinants of success in long-term investing doesn’t involve complex market knowledge or knowing where the stock market will move next. It’s something anyone can harness: emotions.

The bad news, however, is that when it comes to investing, it can be incredibly difficult to control these emotions. When global stock market events cause volatility, and the media is predicting the next “financial doomsday,” making rational decisions can seem just as challenging as understanding every nuance of the market.

Thankfully, controlling your emotions and decisions is achievable with the right knowledge. Here are some focal points to help you avoid emotional investing:

Keep your eyes on the horizon

When a short-term event causes spikes in volatility or a drop in the market, it’s tempting to adopt one of the most dangerous emotions in investing; fear. Fearing that your long-term goals are in jeopardy, you might be tempted to sell your investments, at least until the storm blows over.

Realistically, however, if you have a long enough investing timeframe, these events won’t impact your goals. What will impact your goals, however, is acting shortsightedly and irrationally through emotional investing. The data says it best: investors who try to time the market end up losing 2.5 percent every year overall.

The best prevention strategy is to keep your eyes on the horizon, so to speak, by looking at the end goals of your investment strategy, and what’s needed to get there. For instance, if you’re investing to retire in a few decades, you’ll realize that in the grand scheme of things, the market’s reaction to a presidential election is barely a blip on the radar.

Create (or revisit) your allocation plan

The best workout plan is the one you can actually stick to. In the same light, you’ll need to actually stick to your long-term investment plan for it to succeed. That’s why it can be useful to revisit (or lay out) an asset allocation plan if you’re too driven by emotional investing.

As one of the most important pieces of your investment portfolio, an asset allocation strategy determines what portion of your wealth goes into each investment vehicle (such as bonds, stocks, hard equities, etc.). When it comes to emotional investing, shifting a portion of your allocation towards less-risky assets – such as municipal bonds – can help lessen the blow of volatility, and help you stick to your investment plan. Of course, this should be done in light of your investment goals and timeline, in order to not throw off your financial needs.

Use an advisor

Don’t discount the value a trusted advisor can bring to the table. The right advisor can serve as a rational third party. One who has deep experience and knowledge about navigating the markets, and is trying to act in your best interests instead of emotionally can prove immensely valuable.

At LexION Capital, were fiduciary advisors who work hand-in-hand with our clients to help them avoid emotional investing. If you’d like to learn more, schedule a conversation today.

 

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