Your emotions are costing you money
Everyone knows you should buy low and sell high. But this is what is more likely to happen: The market takes a downturn, and investors see as much as a 30 percent loss in their stock holdings. It’s hard to watch, and it’s harder to bear the pain of losing that much money. The math of rebounds means that they will need to rely on even larger gains just to get back to where things were before the downturn. They sell. But eventually, and inevitably, the market begins to rise again. Maybe slowly, maybe with some moderate growth, but by the time the average investor notices an upward trend and wants to buy in again, they have already missed a great deal of the gains.
It can be challenging to watch the stock market’s erratic changes every month, week, or even every day. When you have your money riding on it, the ride can feel pretty bumpy. When you are managing your money by yourself, emotions inevitably enter into the mix. The Dow Jones Industrial Average and the S&P 500 represent more to you than market fluctuations. They represent a portion of your retirement. It’s hard not to be emotional about it.
In 2017, DALBAR, the well-respected financial services market research firm, released their annual “Quantitative Analysis of Investment Behavior” report (QAIB). The report studied the impact of market volatility on individual investors: anyone who was managing (or mismanaging) their own investments in the stock market.
DALBAR’s “Quantitative Analysis of Investor Behavior” has been used to measure the effects of investors’ buying, selling and mutual fund switching decisions since 1994. The QAIB shows time and time again over nearly a 20-year period that the average investor earns less, and in many cases, significantly less than the performance of mutual funds suggests.
Psychological factors account for a significant portion of the chronic investment return shortfall for both equity and fixed-income investors. All too often, investors may make impulsive investment decisions based on irrational emotions, which can lead to buying and selling at the wrong time.
It doesn’t take a financial services market research report to tell you that market volatility is out of your control. The report does prove, however, that before you experience market volatility, you should have an investment plan, and when the market is fluctuating, you should stand by your investment plan. You should also review and discuss your investment plan with your financial professional on a regular basis, ensuring they are aware of any changes in your goals, financial circumstances, your health, or your risk tolerance. When the economy is under stress and the markets are volatile, investors can feel vulnerable. That vulnerability causes people to tinker with their portfolios in an attempt to outsmart the market. Financial professionals, however, don’t try to time the market for their clients. They try to tap into the gains that can be realized by committing to long-term investment strategies.
Do you need help taking emotion out of investing? Fill out the form below or call (317) 903-9157 to schedule a no-cost, no-obligation visit with the retirement experts at ReJoyce Financial.