How To Balance Your Investment Mindset

When it comes to investing, it is natural that many factors are out of our control. Volatility, returns, and market downturns are all examples of things that can occur that you have no control over. However, there are also many things that you do have control over, such as your behavior, risk level and time horizon.

In this article, you will find out what you can control and what you can’t in investing, with some tips on how to best deal with market forces. 

Market Forces Outside of Your Control

When investing, you are likely to be spooked by market forces outside your control, such as market crashes, elevated volatility, and black swan events.

It is important to remember that these factors are all expected and normal for the short-term when investing in markets, and it should be accepted that they will occur. Investing for the long term, however, can help you overcome them as the market has historically trended upwards over time.

Volatility and Returns

Volatility is a measure of how much the price of a security fluctuates. It is something that you can’t control. You don’t know when the market will be volatile, and you can’t predict how much the price of a security will fluctuate.

Although stock and bond returns have been positive in the long run, there have been many short-term periods when returns have been negative. It is not possible to predict returns reliably based on the past performance of a particular asset class, but the longer you remain invested, the less impact any downturns will have on your overall investment performance.

Market Crashes

Market crashes can be caused by various unexpected causes, such as the 2008 banking crisis, COVID-19 or Russia’s war against Ukraine.

A market crash is something that comes suddenly and unforeseen and is outside of your control. You don’t know when a market crash will occur or how long it will last.

Inflation

Inflation can have a negative effect not only on asset prices but also on investor sentiment, as it can make it seem like the value of our investments is declining.

Since it is not possible to know when inflation will occur, how long it will last, or its effect on market returns, it is important not to focus on it too much.

What is important to note is that investing can help you grow your money more than the rate of inflation over longer periods of time, whereas leaving it idle by not investing at all will expose your money to the negative effects of inflation and decrease its value.

The Reality Is You Can’t Predict the Market

There are too many variables and too much uncertainty when investing, so it is not possible to predict where the market is going in the short term.

Instead of trying to predict the market, you can focus on things that are in your control. Your behavior, risk level, and time horizon are the main factors you can control when investing your money.

Short-Term Investing Is a Losers Game

Short-term investing is a loser’s game. The vast majority of investors who try to time the market end up losing money. This is because it is impossible to predict the market, and short-term strategies often lead to significant losses, especially due to the variables outlined above (volatility, inflation, etc.).

Factors Under Your Control When Investing

While your investments may be subject to market forces, there are things you can influence, including your emotions and behavior and how you react to market movements. These can help you ride out periods of volatility and instability to make the most of your investments in the long term.

Investment Behavior and Emotions

Many investors allow their emotions to dictate their investment decisions, which can lead to suboptimal outcomes. Fear and greed are two emotions that can cause investors to make  decisions that can negatively impact their investments.

For example, trying to time the market by withdrawing when markets go down can lead to investors missing out on the best days for the market. Selling when the market is down can also lock in any short-term losses, instead of allowing investors to benefit from staying invested until the market rebounds.

Risk Level

There are a variety of different risk levels when it comes to investing. Some people are willing to take on more risk to potentially earn a higher return, while others are more risk-averse and prefer to invest in lower-risk ventures. 

It is essential to understand your own level of risk tolerance before investing any money. This helps you ensure your investment plan is aligned with your own ability and readiness to handle investment risk. Otherwise, you could end up taking on a riskier investment plan than you are comfortable with, which may result in emotional discomfort when markets are volatile or go down in the short term.

Time Horizon

Time horizon is the length of time you are willing to remain invested. It is one factor you must consider when beginning to invest. A longer time horizon allows for more risk and potential reward, while a shorter time horizon requires less risk as volatility is more likely to have an impact in the short term.

Either way, having a longer term investment horizon can help you reduce investment risk overall. When you are investing for longer periods of time, you are less likely to be affected by short-term fluctuations in the market, as the market has trended upwards over time in the past.

How to Address these Factors

Investing is a long-term strategy. Instead of trying to predict short-term market movements or follow the news too closely, you should focus on the factors you can control, including your emotions, behavior, risk level and time horizon. In order to avoid frustrations with short-time fluctuations outside your control, you can invest in a diversified investment suited to your risk level and time horizon. 

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