As the market has been trending downward for the last while, many investors have been spooked by the prospect of potential losses. While emotions usually run high in the month of February for Valentine’s Day, it’s important to keep them in check when it comes to investing.
Emotional investing is the practice of making investment decisions based on emotions rather than facts or analysis. It typically involves acting on impulses or feelings instead of conducting rigorous research and analysis or focusing on your investing goals. When you let your emotions get the best of you, you can make poor investment decisions, such as buying assets on a whim or selling them out of fear.
Of course, given the recent economic uncertainty and a fluctuating market, it’s entirely natural to feel a little anxious about your investments. That’s why we’re here to give you some tips on how to separate your emotions from your investments and keep your feelings for February 14th.
If you’re constantly checking in on your portfolio, not only are you seeing it change in small increments, but you’re also engaging in obsessive behavior that can make you more anxious about your investments. When the market isn’t performing well, looking at your performance on a daily basis will only serve to validate your fears, but daily performance isn’t an accurate representation of your portfolio as a whole. Take the emotion out of the equation by checking your portfolio less often. Ideally, once a year is fine, but if you need extra assurance, you can start by checking in on your assets once a quarter.
Regardless of whether the market is performing well or it’s in a downturn, it fluctuates over time. If you find yourself worrying too much about potential market crashes, you need to regularly remind yourself that it’s entirely natural for markets to go up and down. Try and ignore the alarmist news headlines that might put you in a panic and focus on riding out the storm when the market, and by association, your assets, take a dip. Currently, economists predict that there’s a 61% chance of a recession in 2023 given the current economic climate. Still, investment strategies are encouraging investors to stay the course as the market will eventually bounce back as its historically always done.
Focusing on long-term investing will help you avoid becoming an emotional investor by forcing you to take a more rational and disciplined approach to investing. It allows you to take a step back from short-term market fluctuations and focus on the bigger picture, which are your long-term goals for investing. Of course, this approach requires patience and discipline, and an understanding of market fluctuations. As long as your portfolio is in line with your risk tolerance and you aren’t making any drastic decisions based on your emotions, it will perform according to your expectations in the long run.
In matters of love, diversifying can lead to some sticky situations. But when it comes to your portfolio, the more diversified it is, the less you’ll be emotionally attached to assets that might temporarily or permanently underperform. When we refer to emotional investing, it’s not only worry or anxiety that can lead to poor investing decisions. Positive emotions such as excitement or extreme optimism can also have the same detrimental effect. When Bitcoin peaked in late 2021, many investors jumped on the bandwagon. As Bitcoin’s value depreciated 60% the following year in 2022, investors who held the crypto coin as a large part of their portfolios felt the burn. Instead, in a diversified portfolio where one asset doesn’t make up the majority, there’s far less room for the emotional fallout that follows a depreciating asset.
Whether or not you’re aware of them, investment biases exist and can drastically impact your investment strategy. By understanding the common biases that may lead to an emotional investment decision, you can be better prepared to identify them, take steps to avoid them, and remain more objective when it comes to making investment decisions. For example, a herd mentality bias might lead you to focus more on what others around you are investing in rather than remaining objective instead of succumbing to FOMO investing. Having a well-developed investment strategy that takes into account potential biases can help you stay focused on the long-term goals of your investments, rather than being swayed by short-term market fluctuations or emotions.
Fear is one of the strongest emotions when it comes to investing. Of course, the higher your portfolio’s risk level, the more you’ll be afraid of losing. One way to avoid this emotion is to stick with investments within your risk profile. Still, in order to diversify your portfolio, you need to learn to become comfortable with the risk and uncertainty of investing in an asset you might be less familiar with. By basing your investment choices on facts and research rather than a gut feeling, whether yours or someone else’s, you can help ensure your portfolio is set up for success.
An asset might feel stable or certain based on your knowledge, but that doesn’t mean it will be in the long term. Past performance doesn’t always equal future performance. Since late 2021, Tesla’s stock has gone down 70%, whereas in previous years it was growing, inspiring more people to invest in the company. While there’s always the possibility of companies bouncing back, in cases like these, it’s important to remain emotionally unattached to companies you’ve invested in. While you may have felt certain at the point of initial investment, there’s no guarantee of a stock trending back upward. Your gut feeling or intuition can be misleading, so learning how to separate yourself from even your positive emotions when it comes to investing will lead to more solid decision-making.
Separating yourself from your emotions when investing is difficult for even the most seasoned investor, regardless of how the market is performing. Having reliable information to fall back on is the only surefire way to ensure your choices are as secure as possible. With Vyzer, you can oversee all the information about your assets in one place, so you can check in on your portfolio and get a better picture of your overall performance in order to make more educated decisions.