5 Tips to Avoid Emotional Investing
Any significant decision in life will bring with it an emotional component. This can be especially true when making financial decisions. When we let our emotions take control of our investing, we could end up making less than ideal decisions. Short-term market volatility reactions can derail us from our long-term investment goals. Market volatility is common and can often be viewed as a financial opportunity rather than a threat.
Just as there are plenty of ways to mitigate risk in your investments, you can also take steps to mitigate your emotional reactions.
Here are five tips on how to avoid emotional investing:
Before you start investing, it’s crucial to take time to think about what your long-term goals are. Your goals will then be your focal point, rather than getting caught up in short-term bumps in the road.
Diversifying will help mitigate impulsive reactions
Everyone knows that diversifying your portfolio is a basic rule of thumb for investing. A strategically invested portfolio meets your risk tolerance, growth goals, and tax efficiency needs. Did you know that having a balanced and diversified portfolio can also help you from making impulsive or emotional decisions? This is because it will inherently lessen your inclination towards tinkering around with it. An even better approach is having a portfolio management team working to maintain your investments in alignment with your needs and goals. This team of professionals can monitor and work with you to adjust your portfolio as they deem necessary.
Try to think logically
Your perspective and mindset can also impact your ability to reach your financial goals. A logical investor knows how to balance their confidence level and focus their efforts on their long-term game. An emotional investor could become hyper-focused on loss aversion during times of volatility, which could cause them to make extreme decisions out of fear. This emotional approach of trying not to lose instead of staying the course, could impact the outcome of your goals.
Block out the noise
The media’s job is to report news in an entertaining way. Reacting to major news in the stock market is common and can easily backfire because your initial reaction is almost always emotional. For many people, the news causes us to react impulsively, both positively and negatively. The news should be a source of information but not the basis for making all your investment decisions.
Consult with professionals
Blindly following what others are doing can be a big mistake. The pitfall with ‘following the herd’ is that once you see others having success in doing something, you believe that you can, too. When it comes to investing, once you decide to get in on the action on something you see being touted in the media, it’s usually too late. Make sure your decisions are aligning with your goals, not necessarily what others are doing.
Your hard-earned money deserves to be invested according to sound processes. Focus on your long-term goals, create a balanced and diversified portfolio, and taper emotional responses to help you navigate the ever-changing marketplace. Utilizing an experienced financial team who is focused on your goals can help reduce your worry during times of volatility. You can take comfort in knowing a team of professionals is monitoring your investments, but they can also be a sounding board to discuss your concerns as they arise instead of making rash decisions.
Brentwood Financial Advisors is here to help you with your financial needs. Our range of services and experienced advisors are dedicated to help you reach your financial goals and attain your desired future.
Contact us today to learn more about our dedicated and personal approach.