Emotions — especially fear — can impact your money decisions and ruin your investing plan.
“Finances, like any important part of your life, can become quite stressful when they are not working out,” says Dr. M. Woody Johnson, a psychologist, and instructor at Online Trading Academy.
Right now, after yet another down day for the stock market, emotions might be running high. One emotion, fear, might make for serious problems with your long-term investing plan and can even lead to losses to your retirement portfolio.
It's important not to let your emotions rule your portfolio.
Don't Let Short-Term Volatility Mess Up Your Long-Term Investing Plan
A number of emotions can hold your portfolio back, resulting in losses to your portfolio.
Fear is probably the biggest emotion you have to worry about. Things are a little bit scary because there's a lot of uncertainty over what's next for the economy, as well as concern about whether or not the recent run in the stock market was too much, too fast. Things have fallen so much in recent days.
The good news for me is that I'm in it for the long haul. So I'm not ready to sell anything yet. With the whole market dropping, I have no reason to cut my losses. Besides, the fundamentals haven't changed yet. I still think my choices are solid investments for now and for the future.
Before letting fear take over, you need to step back. “These decisions can at times take on a life or death quality, depending on how you view them,” points out Johnson. “If that is the case, then your subconscious will view it as a threat.”
It's bad enough if your conscious mind is freaking out over the situation, but throwing your unconscious mind into the mix can make things even worse. It can lead to panic, and it's rarely a good idea to make any decision — especially those related to your investing plan — while you are in a panic.
So, how do you keep from panicking?
Do You Have a Good Investing Plan?
First of all, it helps to be invested in the “right” things for you. When you have a good investing plan and you are confident in the long-term outcome, you're more likely to avoid panic. This is why paying attention to your retirement investing plan is especially important. You want to know that, over a period of decades, you are likely to come out ahead.
Invest with the following items in mind, and you will be less prone to panic when you see a dramatic drop in the stock market:
Worry about loss leads to panic. Understand your risk tolerance so that your portfolio is built in a way you can handle. When you have a portfolio appropriate to your risk tolerance, it will be easier to keep your cool and not let emotion rule your decisions.
One of the most interesting things I learned from Oblivious Investing: Building Wealth by Ignoring the Noise by Mike Piper is that, over time, the stock market as a whole has yet to lose. So, if you can hold on to that reality, even in the midst of short-term volatility, you will be able to stop making panic decisions and instead evaluate investments on their value.
Index funds and index ETFs
I love index funds and ETFs because you can take advantage of the ability to diversify. Just about any asset class can be bought with the help of ETFs. Get into an all-market index fund or all-market ETF, and you get the advantage of the entire market performance. And, during times like these, when things look somewhat bleak, you can take comfort in the above point, and reinforce calm.
Finally, create an investing plan with long-term goals in mind. What happens today or tomorrow isn't that important in the grand scheme. When you have long-term goals in mind, it's easier to avoid getting sucked into the fear spiral that often characterizes market performances like those seen recently.
Don't change your investing plan without good reason. When you create a plan with the above points in mind, remind yourself that it's a good plan to ward off the fear and other emotions that can result in abandoning the plan. If you abandon your investing plan due to panic, you could lock in losses and mess up your retirement.