When Our Emotions Get The Best Of Us
How to respond when bad things happen to good investors.
I think you’ll agree that few good decisions are based on fear. However, the emotion of fear can be hard to resist, particularly when our hard-earned dollars are at stake.
When markets dive, as they do from time to time, there’s a temptation to pull all money from stocks and to put it into more predictable investments. While that might make us feel better, historical trends show the market will rebound and stock values will trend back upward.
“FEAR is an acronym in the English language for False Evidence Appearing Real.”
I don’t want to oversimplify here. There certainly is a time to make radical changes to an investment strategy. But the changes should be made when we’re fully informed and not reacting based on fear.
In general, the only way a market dive will cause you to lose everything is if 100% of your wealth rests in a single investment that goes south. To manage risk, we recommend a diversified investment strategy. For example, in some years real estate may be booming while precious metals hit rock bottom. Having an investment plan that balances these risks generally pays off over time.
A healthy strategy also takes your timeframe into account. If you need the money in two years and can’t tolerate loss, then a conservative investment strategy is called for. If you need the money in 25 years and can tolerate the ebb and flow of the market, then a more aggressive strategy is what’s needed to make significant gains over time.
Financial advisors, like me, are here to help you make decisions on a factual basis. It’s not our job to push you toward a particular investment, but to listen and present the options.
With finances, as with anything in life, we make our best calls when we look at facts instead of fear.
Would you like assistance creating or updating a financial strategy?
Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including loss of principal.