The Emotional Investing Cycle
The last quarter of the year can be a rewarding one, but it also can be a challenging one. Being aware and concerned about your financial situation and investments is natural and healthy. Your savings represent your capital for future use and can be the result of someone’s hard work. For those at or near retirement, you hope it will, in large part, allow you to maintain a comfortable lifestyle through your retirement. This is why you need to be highly cautious of emotional investing moves. Investors should seek to become aware of their behavior in times of volatility, as well as opportunity. Being too fearful or overly optimistic can many times lead to rash or poor decisions. Your emotions can make you a reactive, instead of a proactive, investor.
Knowing your investing behavior and how to effectively control it is an important tool to help navigate not only volatile times, but it can also allow you to avoid impulse investing on “too good to be true” opportunities.
Having a firm grasp of the three major things you can control can will help you maintain discipline and direction toward your goals. Those three things are:
1. Your risk tolerance or appetite
2. Your time horizon
3. Your behavior
Remaining focused on the plan that you have set for yourself can be difficult when markets rise and fall, but it can be a critical part of your investing success or failure.
As your financial professional, one of our goals is to help our clients be comfortable with their investing experience. Equity markets will always have the potential to move up and down. Making sure your investment plan is focused on your personal goals, your risk tolerance, and timelines can help you through all the stages of the investing cycle.
Having pre-determined entry and exit points is an important strategy to integrate into your overall investment approach. Optimizing your return while managing risk should be a priority when investing. Taking the time to evaluate both ends of your personal strategy can help save you a lot of time, mental frustration, and help avoid emotionally driven decisions.
As the saying goes, “We are our own worst enemy”. This can hold true when an investor does not have a set plan and spends time and energy vacillating on their decisions. Emotions, media magnification and sensationalism, and loss aversion can be major roadblocks and interrupt even the best intended investor’s sound investment judgment.
Four factors that investors should focus on are:
1. Your risk tolerance or appetite.
How much risk are you willing to take, or better yet, how much can you afford to take?
2. Your time horizon.
The amount of time you want to be invested in any particular situation can help you determine your entry and exit points. Where many investors tend to stray is when they try to outguess the market.
3. Your behavior.
How well can you emotionally endure the potential ups and downs of your investments? Market volatility is part of the investment experience and can create panic and anxiety. Staying the course of a pre-determined strategy can help alleviate emotion-based decisions.
4. Your overall strategy.
Are you looking at something that doesn’t quite fit with your overall strategy? Investors should try to avoid emotions and stick with their predetermined strategies.
Saving time and money and reducing risk and stress can all be a byproduct of carefully creating and most importantly, adhering to, entry and exit points in your investments.
Our advice is not one-size-fits-all. We will always consider your feelings about risk and the markets and review your unique financial situation when making recommendations. If you would like to revisit your specific holdings or risk tolerance, please call our office, or bring it up at our next scheduled meeting. If you ever have any concerns or questions, please contact us!
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A skilled financial professional can help make your journey easier. Our goal is to understand our clients’ needs and then try to create a plan to address them.
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