It’s simple, investing is emotional. Imagine it’s 1999 and the stock market is going straight up. Tech companies are growing exponentially and everyone you know is talking about how much money they are making in the stock market. This was an exciting, even euphoric time for investors and people put money into technology stocks at a record pace. Then a crash happened that would later be known as dot-com bubble bursting. Stocks plummeted from 2000 to 2002, and investors felt nervous, scared and even despondent.
People tend to invest when it feels good. When bull markets are raging and things look rosy across the board it is natural to want to add as much money as possible to investments. But history tells us that markets are cyclical and will eventually correct downwards. Then when bear markets are going down, people tend to get scared and sell.. effectively capturing their loss.
For most people, taking the emotions out of investing is anything but easy. If you have worked for 20 years to build up a substantial portfolio, even small market movements can mean large dollar movements. Understanding that any gain or loss is not captured until the asset is sold is a great start to not getting emotional. Also, understanding that volatility is normal for markets and focusing on time horizons and specific goals can help put things into perspective. It’s not as big of a deal if your account balance falls if you have 30 years left until you need it, as compared to 1 year left. Thus, knowing your assets are invested appropriately for your time horizon and goals can give a great peace of mind when things get ugly.
I have experienced first-hand how the client-advisor relationship is a great way for investors to have support when investing gets emotional. I help my clients rebalance their portfolios in both up and down markets. When things are amazing and that bull market won’t seem to stop is a great time to step back and take some gains off the table. Similarly, when a bear market is looking really bad and people are panicked, moving some monies out of safer investments into beat up stocks can be a great move. Think of it like selling high and buying low in any market environment.
One of the biggest challenges to staying level headed about investing is the media. When markets correct the news is reporting doom and gloom, the world is ending. Talking heads are saying to go to cash, and perhaps friends are saying how they sold their stocks. Staying resolute in your plan can be incredibly challenging, but remember there is opportunity in any market conditions. If you stay disciplined and follow your plan you can avoid emotion based investing mistakes.