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"This requires you to set aside your emotions when the market is in a correction or recession," says Michelle Scarver, principal at Exencial Wealth Advisors in San Antonio. "You have to fight your instincts and stay in the market."
The outperformance of the market always exceeds the downturns in the market, Scarver says. She points to a JP Morgan study that shows the average recession is 15 months, while the average market expansion is 47 months.
"If you can remain in the market during the downturns, you will reap the benefits during periods of expansion," Scarver says. "There are more of them, and they are longer."
"You should never rely on emotions when it comes to investing," Shepard
Here are seven strategies to avoid emotional investing.
- Stay focused on long-term goals.
- Buy low, sell high.
- Maximize diversification.
- Examine your motives for making a shift.
- Take the news with a grain of salt.
- Create a rules-based approach to investing.
- Enlist a trusted advisor.
How to understand those strategies?
Keywords:
Long term, Buy Low sell high, Maximize, Examine, a grain of salt, a rule-based approach, enlist.
Action words: Stay, Buy, Sell, Maximize, Examine, Take, Create, Enlist.
Stay focused on long-term goals
"Investors need to see the bigger picture and remain long-term oriented. Typically, losses are more likely in the short term, so investors who make emotional, impulsive decisions could hinder the success of their portfolio," Shepard says.
Buy low, sell high
This requires you to set aside your emotions because you're doing the opposite of what the market is doing, Scarver says. "When the market is at a high, people tend to want to enter the market. However, this is the time to sell what has outperformed in your portfolio and buy what has underperformed. To help you buy low and sell high, pick a time once a year to rebalance your portfolio back to your target asset allocation. This forces you to sell what has become overweight in your portfolio and exceeded its target, and redistribute assets that have become underweight in your portfolio that are below target."
Maximize diversification
Instead of chasing home runs that can lead to underexposure or overexposure in any one sector, focus on seeking consistent returns by investing equally across 11 market sectors to protect against extreme market risks, Cook says.
Examine your motives for making a shift
If you're about to make a change in your portfolio, identify why exactly you're choosing to make that change, Vojdani says. "If the buy or sell decision you are about to undertake is because of a short-term market movement, that decision is probably based off emotion and shouldn't be executed," he says. "If your decisions are based on a long-term views and backed with data, that is more often than not a prudent decision."
Take the news with a grain of salt
Dramatic market news can be a factor injecting higher emotions around your investments. "Tuning out the headlines and everyday noise can be a great factor in limiting how often emotions will impact your portfolio," Vojdani says. "Reading insights from trusted sources or consulting with a financial advisor can prove immensely helpful. Also, data such as quarterly earnings and transcripts of quarterly earnings calls that companies share are great sources in making informed decisions."
Create a rules-based approach to investing
"By taking a mechanical approach of setting rules and sticking to them, you can eliminate emotion from the equation," Cook says. "Maintain discipline to limit reactions to the market to when predetermined rules dictate."
Enlist a trusted advisor
Do your homework and work with a coach or advisor that has your best interest in mind, Shepard says. "Emotional trading can cost investors tremendously over a decade, so enlisting the help from a trusted professional will allow an investor to stay on the right track and avoid emotional hiccups," he says.
