Emotions can run high when market conditions turn difficult. It's important to recognise how investing affects your emotions – and how to make sure they don't get the best of you.
The following rules of thumb may help to keep your emotions in check when making investment decisions:
1. Trust in the investment process.
As markets change quickly – especially downwards – making knee-jerk decisions can be tempting. The emotions that changing markets engage can cause you to make unnecessary investments and base decisions on short-term factors, rather than thinking for the long-term.
Don't attempt to predict future price movements during times of adversity. Instead, simply stay invested. As tough as it may be to sit back and do nothing as the markets move quickly, it is better to simply trust in your investment process. After all, a well-constructed portfolio should be designed to weather bouts of short-term market turbulence in order to deliver positive returns over the longer term.
2. Reset your thinking on losses.
Sensitivity to loss and stress levels can increase if you focus on the isolated performance of individual investments through a narrow lens. Don't look at losses in isolation – instead, consider them on a portfolio basis. The combination and mix of different assets in a portfolio, across a range of asset classes and geographies, can ultimately deliver better risk-adjusted returns and more consistent long-term performance.
3. Keep your confidence in check.
Overconfidence in investment can lead to misguided investment decisions, especially if an investor has overestimated their own ability to evaluate a potential investment.
So, even if your gut tells you to believe in a particular investment, and perhaps to invest a significant proportion of your wealth into it, reason demands a more cautious approach. Having too much faith in your decisions isn't as practical as a well-diversified portfolio, which avoids over-concentration of risk in any given asset or area and should ultimately deliver the best results for you over the longer term.
4. Skill comes with experience.
Typically, past performance isn't a good indicator of future success. Our brains like to make us believe positive outcomes are based on our own skill, whilst negative are purely bad luck. Skill does have some part to play in making good investment decisions, but short-term outcomes generally involve considerable luck; skill generally will become apparent over a longer timeframe.
5. Don't be afraid to delegate.
There is no perfect time to invest or to review your portfolio. Busy investors tend to wait until there is a lull in their schedule to review in your investments, which isn't the most profitable approach.
Outsourcing the responsibility for making investment decisions through a discretionary mandate can be a good solution. Not only will it result in capital being put to work as early as possible, but it will also lead to a regular, disciplined and systematic approach to investing – where emotions are no longer allowed to interfere with your long-term wealth strategy.
Being aware of how emotions impact behaviour can help you guard against irrational investment decisions. That said, recognising these traits in yourself and keeping them in check can be tough – especially when market conditions continue to be challenging.
Investors who want to benefit from a rational investment programme may find it worthwhile talking to an investment professional – someone who can guide you through volatile market conditions and make decisions that serve your best, long-term interests.
Why not commit to reviewing your investment portfolio with your Investment Counsellor?
A portfolio review is an extremely valuable exercise and should help you avoid some of the investment biases and impulsive short-term decisions that this article describes.