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It may seem like investors behave rationally at all times, carefully considering various factors to arrive at the most logical decision at a given time. But the reality is that investors are human beings filled with emotions and it’s natural to be emotional about investing your hard earned money. Unfortunately, when you’re emotional, you typically don’t make the best investment decisions.
Here are some tips for keeping emotions out of your investment decisions so that you are more likely to achieve your long-term goals.
What is emotional investing?
Emotional investing is when you let emotions such as fear, greed or envy drive your investment decisions instead of using logic or sound reasoning. It’s normal to feel emotional about investing, but letting these emotions drive your decisions can cause you to do the worst thing at the worst time.
“As humans, we’re hard wired to want to be part of the crowd,” says Carol Schleif, chief investment officer at BMO Family Office. “If you’re doing investing right for the long-run, it shouldn’t feel comfortable.”
Market volatility is a normal part of long-term investing. If you’re always selling what has gone down to buy what has gone up, you’re not likely to end up meeting your investment goals.
5 ways to keep emotions out of investing
1. Automate decisions
One of the easiest ways to keep emotions out of your investing decisions is to make your decisions before emotions get involved. Automating investments by making regular contributions to retirement plans or setting up automatic withdrawals if you’re already retired can help simplify the process and remove emotions from the equation.
Automating certain investment decisions means you’ll be buying or selling on a regular basis, which means sometimes you’ll buy when prices are low and sometimes you’ll buy when they’re high. This approach, known as dollar-cost averaging, has proved to be successful over time and allows you to avoid emotional responses to market events.
2. Steer clear of financial media during a crisis
When a financial or economic crisis hits, you may feel the need to pay more attention to the news so you can make any necessary changes to your portfolio. But staying glued to financial media may actually work against you during a crisis. You’ll hear from plenty of market commentators who themselves may be feeling quite emotional, as they see their investments decline and they grow fearful about the future.
“The media does not exist to make you feel comfortable about your portfolio,” Schleif says.
If you listen to so-called market experts talk about how bad things could get, your desire to be part of the crowd could kick in and cause you to sell stocks at just the wrong time. You’re likely better off sticking to your plan and ignoring the news until the dust settles.
3. Know your “why”
Understanding why you’re investing in the first place can also help you to stay calm when markets get crazy. Schleif recommends keeping a list of investment goals or objectives and pulling it out during times of market stress to remind yourself.
Placing assets into different “buckets” can also help keep you on the right track. If you know that the money you need for emergencies and the next few years is only in safe investments, then you’re less likely to panic when stocks fall because stocks should only be held in a long-term “bucket” such as retirement. The fact that you don’t need the money in the immediate future is what allows you to take risks in the first place.
4. Avoid market timing
One common emotional reaction people might have when it comes to investing is in response to a deteriorating economy. If you think the economy is headed for a recession, you might think that you should sell your stocks to avoid losses when the economy is down and then buy them back before things improve. But in reality, this is extremely difficult to do.
“We try to talk people out of ‘all or none’ decision making,” Schleif says. “There’s this fallacy that you can get all the way out, or all the way in.”
Instead, Schleif encourages investors to think about various scenarios that could play out and positioning their portfolios based on the most likely scenarios. People who sell for emotional reasons often have a difficult time getting back in, she says.
5. Hire a financial advisor
Finally, if you don’t feel confident that you can manage your investments on your own without making emotional decisions, hiring a financial advisor can be a great option. Having people you trust is important if you’re going to reach your ultimate financial goals, Schleif says.
Advisors can help with a variety of financial tasks such as budgeting, retirement planning, taxes and more. But they can also help keep you on track when you’re feeling uneasy about investing.
“The role that advisors play is to keep emotions out of it,” Schleif says.
Bankrate’s financial advisor matching tool can help you find a trusted advisor in your area.
Letting emotions drive your investment decisions is not likely to generate the results you need. Consider automating some of your investment moves in advance and always keep your long-term goals top of mind. Fight the urge to take actions driven by emotions such as fear or greed. Hiring a financial advisor can also help you stay on track and provide you with well-reasoned advice if and when you become emotional.