The news of the world can easily lead you to make emotional investing mistakes. You may suddenly be questioning your investment choices based on recent market performance.
On any given day, you can see wild swings in the markets. It’s impossible to say where the markets will go in the near term with so much turmoil in the world.
It’s essential to keep a steady mindset about your investment and focus on the future instead of the moment. In this article we will explore three key strategies to help you avoid emotional investing mistakes.
Steady as she goes (steady as she goes)
So steady as she goes (steady as she goes) — Jack White / Brendan Benson
Maintain your focus and stay humble
The fact is, it’s extremely difficult to tell where the markets will go in the near term, no matter the state of the world. That’s why many investors who seek financial independence choose broad market index funds, like VTSAX, to buy and hold for the long run.
Choosing a simple and diverse investment strategy is an easy way to avoid emotional investing mistakes.
The returns for the S&P 500 Index for the four years ending in 2021 were remarkable and may have even gotten to your head. Even a global pandemic couldn’t drag down the performance for 2019–2021 (28.88%, 16.26%, and 26.89).
Returns like that can make you feel like you are brilliant and cannot lose. Suddenly, your emotions begin to weigh in on what should be decisions based on fundaments. Falling into this trap leads to emotional investing mistakes.
You have been pretty bright if you chose to buy a diverse portfolio like one built on index funds. However, your smartness didn’t create those great returns.
And an emotional investment choice to buy a single stock was little more than a gamble. Taking huge risks based on false self-confidence is one of the biggest emotional investing mistakes.
You may suddenly be questioning your investment choices based on the market performance in 2022. The year produced the for broad market significant losses since 2008. There were only three years since 2008 that the S&P 500 Index didn’t post positive growth.
Your emotions could be telling you to sell and avoid further losses. Emotional investment decisions often lead to disastrous results. At times like this, it’s important to understand your investment risk tolerance.
Many people panicked and sold in 2008 when the S&P shed almost 40% of its value. The emotional investing mistakes this group of people made have been nearly impossible to recover from.
Those who stuck with their long-term plans and continue to invest through the most challenging times in the market have seen remarkable gains. This group avoided emotional investing mistakes by staying focused and blocking out the noise created by daily moves in the market.
I didn’t have a clue in 2008. I had some experience with a few individual company stocks in 2000 that went to zero, and I knew that I didn’t have the talent to pick winners. By 2008, I had a promising career and was able to contribute fully to my retirement accounts. I knew that the housing crisis was a big deal, but I didn’t pay much attention to the markets. I continued to contribute, even when the short-term outlook was bleak.
I wasn’t very concerned about the state of the market in 2008 because I knew that I was focused on saving for something many years away. I had no clue that I was gaining a bigger share per dollar invested by buying into the market when it was down. Remarkably, that never occurred to me until I read The Simple Path to Wealth by J. L. Collins. Sometimes you are lucky.
Keep faith in your long-term strategy
Your goal is long-term wealth accumulation when you are saving for financial independence. The moves in the market from day to day, or even a year, are not all that important in a journey that you will fund for many years and maintain for many more after you stop contributing.
One of the biggest emotional investing mistakes is letting the news of the day sway your overall investment strategy.
You will be better off if you can focus on your long-term goal and block out the near-term noise. You gain nothing by stressing about the market and its performance today. Even worse, you could let your emotions get to you and decide to sell in a down market.
“Be Fearful when others are greedy and be greedy when others are fearful” — Warren Buffett
That’s a frequently referenced quote associated with the buy low and sell high philosophy of investing. Overused or not, I think this advice is very applicable to those of us saving for financial independence. There’s little reason to panic and sell when the market is down if your timetable is well off on the horizon.
Realize that investing is not a smooth road
We’ve been treated to some years of outstanding performance, and it’s easy to get comfortable and even expect significant returns. The fact is, there have been some very poor performing periods in history. There is never a guarantee that your investment is going to gain anything.
If losing money in your investments is new to you, acknowledge how this experience makes you feel. If you haven’t felt like this in a long time, like me, reassess how this experience makes you feel.
You may realize the investment losses are pulling at your emotions.
We really like winning. It feels good, and the time horizon for financial independence closes quickly. Times like these remind us that there are storms to weather. Some of them might be huge.
You need to stabilize your emotions to weather the ups and downs that will occur during your investing lifetime. Don’t let the ups go to your head, and don’t let the downs drag you under. In the long haul, the markets have historically grown. While past performance is no guarantee of the future, it’s a reasonable bet that the markets will gain over the long term.
Avoiding emotional investing mistakes takes work
The markets performed terribly in 2022. You may be feeling quite down about the decisions you’ve made with your investments. It’s essential to maintain the site of your long-term goals. Like me, your investment goals are long-term if you invest for financial independence.
Make sure that you assess how a downturn makes you feel. It’s critical to understand how you feel to avoid emotional investing mistakes.
Perhaps, you have invested more aggressively than your comfort level permits. It’s hard to tell how aggressive it is too aggressive when the markets are up. Use a downturn to adjust your long-term strategy to feel more comfortable weathering the storms that will undoubtedly come.
Emotional investing mistakes can ruin your long-term plans. Always remember, it’s best to stay steady.
When you have completed what you thought you had to do
And your blood’s depleted to the point of stable glue
Then you’ll get along
And then you’ll get along
Steady as she goes (steady as she goes)
So steady as she goes (steady as she goes) — Jack White / Brendan Benson
