How to Avoid Making Emotional Financial Decisions
You’ve spent years building a healthy retirement nest egg. Then Wall Street takes a surprise nosedive. First, you’re down $10,000, then it’s $15,000.
Now it feels like a challenge and you decide that investing inherently means taking on risk. You’re not stopping until you win your money back (and then some). You put more money in the market. Before you know it, you’re down another $25,000.
Don’t let this happen to you.
Are You Gambling or Investing?
Making your financial decisions alone—especially in the midst of market volatility—can be a perilous task. It can be easy to make the wrong choices when you watch your hard-earned money disappear.
When it comes to investing, it is crucial to have a steady hand. If you make spontaneous decisions based on your emotions or the ever-present ebbs and flows of the market, then you’re risking making your carefully invested funds into little more than gambling money.
Keep yourself from turning into a gambler. The following techniques can help.
What Is Your Investment Philosophy?
You should have a clear vision of how you intend to invest and why. This step is essential for making decisions that serve your larger financial goals. Knowing your investment philosophy will keep your attention on the big picture instead of on market highs and lows.
Focus on the Long Game
It can be tempting to check in on your investments every day. After all, you want to know how you’re doing and if there’s anything you can change so you do better. But checking your performance too frequently does more harm than good. It may distress you, which could encourage emotional investment decisions.
Instead, it makes more sense to check your investments on a less frequent basis, like monthly or quarterly. This way your financial goals remain the focus, rather than market gyrations.
Partner With a Professional
The value of working with a financial professional is that you have a partner that will help you counter some of the risks that come with investing. Keeping in touch with them regularly will help you feel less isolated in your financial decision-making. They can share the research burden with you and help to create a plan to implement investments based on your personal goals.
This partnership is especially beneficial when your investments fall in value. A lot of people who lose money during market declines want to liquidate their investments while the market falls, then re-invest after the market recovers. Essentially, their inclination is to sell low and buy high. This makes it almost impossible to efficiently meet long-term financial goals.
If the market dips and you feel anxious, the best course of action is to call your trusted financial professional. They will be able to discuss with you how to best respond to market downturns in a way that aligns with your personal goals. Having a third-party analysis on hand can help take the emotions out of your financial decisions and help you stick to your long-term plan.
Trust in Your Plan
If you’ve worked with a financial professional to develop a sound plan, then you can rest assured that market volatility is accounted for.
Keep in mind that there are some instances where your financial goals may shift. When that happens, it’s a good time to re-evaluate your plan. Talk to a financial professional if you have questions or concerns.