3 Ways to Avoid Emotional Investing

By Last Updated: June 16, 2023
avoid emotional investing

When people are controlled by fear, they act rashly and jump to ill-defined conclusions. We often see this scenario at play when it comes to investing. We refer to this behavior as emotional investing. When you look at historical growth models of the S&P 500, investing is clearly a long-term game. Buy some market shares and wait for the gains by staying invested. Unfortunately, the fear and guilt propagated in some financial newsletters or the media coverage of volatile markets can persuade us to work against our own best interest. Whether through an attempt to time the market, buy an annuity, or invest in gold, often our fear-based decisions don’t pan out.

Here’s 3 Ways to Avoid Emotional Investing:

  1. Write Out Your Portfolio Purpose

I recently met with a friend of mine who had a one-page write up of the amount of money he wanted to retire with, his investment accounts attached to this goal and how much he was saving to get there. More importantly, he listed that he was saving to get to his retirement number so he could stay home more and play vs. staying longer in his current traveling job that was tiring and all business. He had a purpose to his goal and the math calculated to get there. This is what every client has at our firm using our guidance, but I was impressed with his solo effort. I frequently meet with successful business owners and they also often have a complete business plan on two pages of paper that gives them their daily business purpose.

The people in these two examples are motivated by long term goals, not fear. They understand that market selloffs are temporary, and that they have the opportunity to buy more shares vs less shares per dollar when buying at the top of the markets. Write out your portfolio’s purpose. You can’t meet your portfolio’s purpose holding cash. Therefore, if you are going to invest, think through who or what you are investing for and write it down.

  1. Maintain a Diversified Portfolio

Building a diversified portfolio will help with portfolio anxiety. Holding Vanguard ETFs like VTI, VEU and BND will create all the basic diversification that an investor needs in a portfolio at a very cheap price. If you want less market volatility, simply add more funds to the bond fund. In this portfolio, you are holding nearly 6,700 stocks and 9,000 bonds. You have little risk of going to $0, so focus on that long term stock chart and keep an allocation to bonds that helps you sleep at night.

  1. Turn off Financial News and stop checking the balance everyday

So, you have a plan and a good portfolio. Now it’s time to turn off the fear promoting financial news media and stop checking your portfolio balance every day. The financial news media knows that fear will drive viewership. The more sensational headlines are only trying to drive you to buy the paper, stay tuned to the channel or subscribe to the newsletter. The truth is there will be bad a day in the market. But one day will not define your portfolio. In fact, if you don’t have that bad day, you won’t get the best days either. Thank goodness, historically, there have always been more good days than bad ones.

I have a middle school daughter and middle school girl drama is real! I often find myself telling her that she should never allow others to steal her joy. I think this same advice applies when it comes to looking at your portfolio every day. If you look at the portfolio going down, and down again, and then up a little, but then back down, it can be easy to let these fluctuations steal your joy. But remember, you have a plan and a diversified portfolio. If you are a Wiser Wealth client, you can keep in mind that even with a 20% hit in your portfolio, you can still make your goal. Stop letting the numbers on the page affect your mood. Do something in the morning that brings you joy or brings joy to others rather than spending those precious minutes checking and obsessing over your portfolio.

Robots can now invest portfolios with low fees, great diversification and good performance, but it still takes great financial planners to help build great long-term plans. Fortunately, the growing number of fiduciary and fee-only advisors are rising to this task. The best financial advisors are also good at coaching clients through market rough spots, which increases the clients’ rate of return. I only had one or two families wanting to go to cash in the 2020 Covid Crash. Thankfully, through much negotiation, I was able to guide them from a complete liquidation. The rest of our client base saw the opportunity (maybe they were listening to our podcast) and were buying more shares per dollar to their benefit, now that the market is recovering.

Have more questions? Contact us

Casey Smith

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