Four Ways to Avoid Emotional Investing

Stop the emotional roller coaster and stand on solid ground with your investments
By Andrew Rafal

The average investor typically allows emotion to influence investment decisions and it can be a tough inner battle. Let’s face it, many of our purchases are emotional. But when it comes to investments, emotion-fueled actions such as buying stocks when they are high and selling stocks when they are low is a recipe that often results in low returns. Similarly holding onto a particular stock only because of emotional ties can hinder portfolio performance too.

According to a 2014 Forbes Magazine study, the average individual mutual fund investor consistently underperformed against a variety of asset classes and barely kept pace with inflation. The main reason was emotional investment choices. Here are four ways to avoid the emotional roller coaster of investing.

    1.  Don’t chase returns: One of the most common mistakes is to over-react when the market starts to move. Of course what certainly doesn’t help is hearing news headlines, such as “stocks plunge,” that tug at our emotions to do something or supposedly face financial ruin. A stock or investment should be part of a long-term plan put in place for your retirement goals. Market fluctuation shouldn’t prompt drastic buys or sells based on a day’s price. Investing in a stock after an upward streak or dumping it after a downturn doesn’t benefit investors.

    2.  Have realistic expectations:  If you have a low risk tolerance or have a portfolio that includes stable companies with long-term projected growth, don’t expect to hit a home run with double-digit returns in a calendar year. Also, if you have some risk in your portfolio, expect some fluctuation. Many people want the upside potential but don’t want to take any risk or lose anything, which is unrealistic. A diverse, long-term plan created with your goals in mind will help set expectations for the years ahead.

    3.  Don’t challenge the stock market: Some investors want a challenge. They believe the stock market is a game that they need to beat. It’s a myth that constant investment moves help to gain greater returns. No, it’s not fun to invest and stay put, therefore looking at the same investments every year. But it’s essential to make sure you’re investing smarter rather than playing a buy and sell game you likely won’t win.

    4.  Have a long-term plan: Emotional investing can happen when there is not a long-term plan in place that was customized to meet your specific goals. It’s easy to veer off track if the track isn’t clearly defined. The investment choices of someone planning to cash out in 10 years would differ greatly from someone who had just 10 years of work under their belt. It’s always best to maintain a long-term outlook, keep your goals and plan in mind and steer clear of taking a left turn in the road

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At Bayntree Wealth Advisors, we pride ourselves on helping each financial planning client understand the risk they are currently taking in their investments portfolio and ensure the risk is aligned with their long term goals.  Bayntree Wealth Advisors is dedicated to working with our clients to design a retirement and financial roadmap that will help meet their long term goals.

Click here to learn more about how our financial planning team can stress test your portfolio.

If you have questions or would like a review of your current plan and strategy, contact Bayntree Wealth Advisors at 888-255-3200 or info@bayntree.com. Andrew Rafal and his team at Bayntree proactively addresses market changes to ensure clients’ opportunities are maximized. With it’s headquarters in Scottsdale, Bayntree Wealth Advisors is a nationally-recognized financial advisory firm that specializes in developing customized financial strategies to help clients reach their long-term goals.

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