When the stock market has a poor day, it's frequently easier said than done to ignore the news and stick to your financial plan.
This is not something that everyone is capable of. Investing in the stock market acts like a tractor beam, pulling you into a short-term view of your finances. We can't help ourselves. Emotions have far more influence on our decision-making than logic or statistics.
Thinking about how you could react emotionally to market movements can help you avoid making rash decisions that aren't in your best interests in the long run. Here's how you can get ready.
Ignoring your emotions may appear to be sound advice, but it isn't realistic for most people — and it isn't necessarily healthy.
You must learn to manage your risk feelings in order to optimize your portfolio and achieve your financial goals. As an investor, you must find a balance between feeling good when the market is rising and feeling horrible when it is falling.
This is known as emotional balance, which refers to being in a balanced condition regardless of performance.
Do things in advance to prevent yourself from making bad decisions.
Try making a firm plan during normal times for how you’ll handle a downturn. Put that plan in the form of a letter or you write to yourself, so you have guidelines to follow when things turn emotional.
One effective way of staying the course is writing down the reason why you invested in the asset. During periods of market volatility, this would remind you of why you invested. If your fundamental reasons have not changed, then dig in and stick to your guns.
It's advantageous to have some cash on hand.
When equities fall, having an emergency fund can be reassuring, and it also gives you the freedom to turn dropping prices into opportunities.
The ability to take action, such as taking advantage of market declines rather than simply reassuring yourself that things would improve, boosts your sense of control, which is a key factor in anxiety management.
Buying in the dips lowers your average cost of investing, boosting your profit margins when stocks begin to trend in the way you expect.
After a market rough patch, it’s important to work through your feelings so they don't lead to more damaging financial decisions.
Let your emotions take the back seat and allow logic and data to take over. Reassess your investment strategy and try to understand where you went wrong. Revisit your reasons for investing in that asset and look for potential loopholes in your investment thesis.
This is where it pays to keep a trade journal because you would be able to reevaluate your reasons more effectively. It is okay to make mistakes, but the bigger problem is not learning from them.
You need to understand that market movement occurs in cycles, and your ability to observe and follow them would make you less susceptible to volatility and increase your profits.
On average, the markets will have 2 down years, 2 flat years, 2 fair years, 2 good years, and 2 very good years with a recession every 20-25 years. Don’t sweat the down years or recessions; they are normal!
Market movements need to be thought of in terms of your goals. When you recognize that market cycles exist, then you will be able to align your investment goals more.
You would overlook short-term movements and focus on the long-term trends. This makes you less susceptible to making wrong investment decisions or chasing trends.
Market cycles also make it possible to know the appropriate portfolio allocation that would be suitable for you. Based on your projections, you can determine the allocation to equities (risky assets) in your portfolio vs. fixed income (hopefully, not risky).
The expected return of the portfolio should be measured against their benchmarks each year to determine if they are doing what is expected. If they are not, then find out why and make a change if appropriate.
Many investors reassess their allocation to more defensive sectors such as consumer staples or utilities during periods of high volatility in the stock market (though like all stocks, those sectors involve risks too, and are not necessarily immune from overall market movements).
Dividends can also serve to mitigate the effects of price fluctuations.
It's possible that keeping up with and absorbing the headlines, news reports, and emotional outpourings of the so-called gurus will be challenging.
It'll only serve to amplify your concerns about the future. There's a lot of competition for your attention on the Internet, in newspapers, on TV, and on the radio. Remember that the media's job is to fill space and time with stories to pique your curiosity and imagination (and not always in the best interest of your goals).
During bull markets, anyone may look excellent; the inevitable downturns generate wise investors.
Even the best investors aren't always correct. If a previous decision now appears reckless, taking a tax loss, learning from the experience, and applying the lesson to future judgments may be the best solution.
Getting advice from a financial professional can help you and your portfolio weather the market's ups and downs while also allowing you to profit from them. Keep in mind that engaging with a financial professional does not guarantee success.
During periods of high volatility, investors must be mindful of the potential hazards.
If you're sure of your plan, staying invested can be a great alternative. If you do decide to trade during a period of high volatility, keep in mind how the market conditions will affect your trade.
The key thing is knowing why you invested in an asset. When you clarify your reasons for investing, then making a choice between staying invested or heading for the exit door is easier. This is because your focal point would be the fundamentals and financial data, rather than emotions and trends.
February 21, 2024
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