Millú Ramirez, CFP®
It is hard to believe that it’s been 15 months since the World Health Organization officially declared the coronavirus outbreak to be a pandemic. In that time, our emotions have been taken on a wild rollercoaster ride called “the market.” In February of 2020, the pandemic crisis caused a steep drop in the stock market. But five months later, the S&P 500 made a full recovery and went on to set new record highs. Had you panicked and sold your stock early on, you would have regretted it.
Money is always an emotional subject, and when our emotions get involved with our investments, we often make wrong decisions.
Keeping emotions and investing separate seems almost impossible for many investors. When reacting too quickly and letting emotions cloud judgment, even the most experienced investors will not make the best decisions. However, keeping your emotions away from your investment decisions can give you a better chance for success. Following these tips can help you keep your emotions out of your investments.
It sounds simple, but setting financial goals is the first step in investing. If done correctly, holding on to your financial goals can keep emotions out of the picture. Having clear, specific goals will help you keep an eye on the big picture. For example, if you are saving for retirement in 30 years, then you know that you have more time to make up for any losses than if you were planning to retire in 5 years. In contrast, if you are saving for college tuition for a middle-schooler, you know that time is essential.
Do you check up on your investments every day? Can you spend hours figuring out how you’re doing and what you might have done better if you had not sold that particular security? Stop! You are just going to drive yourself crazy. Actually, you are suffering twice: you imagine the worst now, and if something actually happens, you worry again. Instead, limit your financial checks to once a month or once a quarter, and concentrate on sticking to your overall plan and goals.
The devil is in the details. Knowing what you are buying and how much you are paying is crucial for helping you avoid emotional setbacks in investing. Always do your research before purchasing anything. And be sure to ask how your broker or financial advisor is getting compensated. (No surprises!) Aim to understand
- The investment
- How it will help you achieve your goals
- What the risks are
- When and how to sell it, if it is liquid
Doing your homework will allow you to own the responsibility for your trades, keeping doubts and negative emotions at bay.
You can create some distance between yourself and your investments by putting a financial advisor in the middle. By engaging a trusted, neutral third-party to examine your situation objectively and encourage you to stay on track, you can hold yourself more accountable for the things that you can actually control.