Keeping Your Investments And Emotions In Check

It is tempting to invest based on how you feel in the moment or due to reading market predictions, but a longer-term and more disciplined investment strategy tends to yield better returns over time. Right now, there is a lot of market uncertainty. Downturns are driving people into phases of pessimism and short-term decisions in their efforts to avoid localized losses. Inflation and the conflict in Ukraine are two driving factors, but too much fear and anxiety can lead a lot of investors to lose out due to panic-selling. In times like this, it is helpful to remember that the market goes in cycles – when it goes down, it always comes back up. A long-term investment strategy minimizes the influence of market volatility.

Reacting to Market Downturns

When you see significant decreases in equity prices, which some people refer to as crashes or ‘anti-rallies’ – don’t panic. Rather than trying to cut your investments in half, or worse yet, hit the button and sell everything, try an incremental approach to focus on getting better returns during market corrections. This means depositing smaller amounts on a regular basis to benefit from the lower prices, also known as a Systematic Investment Plan (SIP) or Dollar Cost Averaging (DCA).

It’s helpful to remember the back and forth that stock volatility patterns take on their way up. For example, take a look at the Dow Jones Industrial Average (DJIA). This and other major indices track with the overall state of the market since the 1930s – in the overwhelming majority of quarters and sessions, prices have gone relentlessly up. Some of that is due to inflation, but other aspects of it have to do with continued growth in markets: growth of companies and services and products with an increase in consumer populations. Or, you can think of it this way – we had a major crash in 2008 and a sustained downturn during the early days of COVID – but the S&P 500 is still up 200% since that time. Those stock prices that form the basket that the S&P uses have more than doubled in just over a decade.

Looking at Contrasting Investment Scenarios

Let’s contrast two common scenarios where investors react to big changes in the market. In the first one, long-term investors buy and hold through down cycles, and gain value over time when markets rebound and grow. In the second scenario, investors panic-sell during a crash, for example, in the wake of the 2008 financial crisis or in the middle of 2020, when coronavirus lockdowns had a depressing effect on stocks. These investors can lose up to 50% of their investments or more by selling when markets dip and locking in their losses. Investors that stick to their long-term buy and hold strategy will reap the benefits when the market goes up again.

Avoid Emotional Selling

Remember: one thing that we learn from history is that a market always rebounds after a financial crisis. With this in mind, there are a couple of common steps to stabilizing your investment portfolio when market volatility seems like it’s getting out of hand. First, as mentioned above, replace the panic-selling strategy with a long-term buy-and-hold strategy which can help you ride out periods of short-term volatility. Holding your investments also allows you to benefit from compound interest. This means that your investments can generate earnings, which can be re-invested to earn you even more interest, and this process can go on and on indefinitely.

Another approach to managing emotional decision making when investing is setting a systematic plan. This is when you deposit a fixed amount at regular intervals (weekly, monthly, etc.) into the same investment, no matter how the markets are performing. This method can help you reduce your average cost per share over time (dollar cost averaging), even when the price fluctuates. It also minimizes stress around market dips, as you know you’ll be adhering to your investment plan regardless of market movement. 

How Can We Help?

Passive investing services can help you grow your wealth over time and mitigate risk from volatile markets. SmartWealth specifically provides you with a customized investment plan tailored to the risk level you’re comfortable with, to put your mind at ease through the ups and downs of the market. This can help you keep your emotions in check, guide you through a clear investment plan, and keep you on track towards achieving your goals.

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