Tips to Avoid Emotional Investing

| March 08, 2022

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:

Set goals

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. It should be a source of information, but the news should not be 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 aligned 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.

Markets are constantly going up and down, but it’s easy to forget that downtrends are part of the investing cycle. When prices are trending lower, it’s easy to second-guess yourself. But over the years, we’ve found that doesn’t help.

Interest rates, inflation fears, political events, international developments… During the past year, every one of these events have influenced stock prices. So when you hear that the financial markets are reacting to the news once again, it should come as no surprise. We know volatile markets can be unnerving, and we are keeping a close eye on the fluctuations. More importantly, we’re watching to see if any new long-term trends emerge that may affect how your portfolio is allocated.

We’ve aligned your investment strategy with your goals, time horizon, and risk tolerance and have built your portfolio anticipating that there will be good times and bad. If you find yourself thinking “this time, it’s different,” please reach out as soon as possible. It’s important that you feel comfortable with our approach and we’d be happy to talk with you. 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.