How to Avoid Emotional Investment Choices
Investing is a marathon, not a sprint. It takes guts to stick to your plan and avoid selling into a bad market. “Buy low, sell high” seems easy enough to master. Many investors fail to follow this advice including DIYers and professional advisors alike. There are ways to avoid the pitfalls of emotional investing — here’s a collection of a few to remember.
Establish long-term goals
If you are glued to the market report and checking your portfolio value every day, you’re playing the wrong game. Investing properly takes a long view and an avoidance of fads and trends in the market. Considering your age and your life goals, you should have an investment plan built for your life, not just your Wednesday. Avoid reading the financial news every day — returns are noisy and volatile over short timeframes. It’s the long game we’re playing here. Don’t check your portfolio every day unless you want to drive yourself crazy.
Avoid selling into a storm
When markets are down, it’s tempting to throw up your hands and say “sell it all.” This strategy can be described as “buy high, sell low” — not the best approach for long-term success. If you are afraid to lose money on any investment, you shouldn’t risk the money in the first place. Think of sports — if the losing team quit as soon as they were down a single point, the game would never be the same. Get rid of your fear of losing, and remember that a single day of bad returns is lost in the big picture after years of investing.
Past performance is no guarantee
Before Steve Jobs came back to Apple in 1997, the company struggled to earn profits and keep their investors happy. Relying on the stock’s past performance would not lead you to think that it was a great investment opportunity. I’ll leave it to you to see how a $1,000 investment in Apple in 1997 would look today (almost $450,000). Also, consider a company like Enron, the disgraced energy company no longer with us. In the runup to their collapse, the company seemed to be unstoppable. Investors flocked to the firm, and it was hailed as one of the most innovative companies in America. By late 2001, Enron was in federal court facing serious criminal charges. The stock tanked and took a California governor with it.
News is noise
Reading the latest investment news can be addictive. It seems like there are nuggets of information out there that a savvy person can find. Trendy products and fancy newfangled business models feel like they are a great opportunity. Who wouldn’t want to be ahead of the curve, making money using market savvy and a keen eye for information? The problem is that the entire world plays this game, and the lonely investor is usually the loser. Every day, there are dozens of new companies and products you can review. Each one wants you to believe “the story” and choose them for your investment dollar. Unfortunately, they are often too-good-to-be-true and take out many investors’ dreams along the way. Pay attention to big economic trends, and leave the rest up to your strategy.
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