Content developed by CUNA Brokerage Services, provided by Jeffrey C. Hamm, CRPC®
Emotions play an important role in some of the most important decisions we make, such as the person we choose to marry, the friends we choose to spend time with, or the home we choose to buy. But
when it comes to investing, emotions can do more damage than good. Here are three ways that emotions play a detrimental role in our investment decisions and what we can do about it:
Don’t Follow the Herd
When stock prices start to fall, it isn’t uncommon for some individuals to sell their stock mutual funds. However, what starts as a few people selling their investments can quickly turn into a panic, where everyone decides to sell. Why are they selling their investments? Because “everyone else is doing it.” All of a sudden, people are making important investment decisions based on what other people are doing. It’s called “herding” and it is one of the most common mistakes that people make when markets decline.
Avoid Extreme Thinking
When markets fall, people often start to think in extremes. Everything in the market begins to look black and white. Instead of asking questions about why the market is falling, they assume
that all news is bad news and that stocks will continue to fall. There is no gray in the mind of someone thinking in extremes. It’s difficult to break free from this kind of thinking. The result is that decisions are based less on facts and more on exaggerated interpretations of the facts. The challenge is to remember that the world of investing is rarely black and white. The facts can have many meanings, and we need to think intelligently about how these facts affect us before we make any investment decisions.
Be Aware of Our Short-Term Bias
When it comes to investing, most of us have a short-term bias. Recent history has a disproportionate impact on our future expectations. All things being equal, recent memories are given more weight than distant memories. That means that recent market gains lead to excitement and higher expectations. On the other hand, recent market losses lead to suspicion and caution. The challenge for investors is not to forget both the long-term history of the markets and their own long-term goals.
Stay True to Your Goals and Your Plan
When markets are volatile, it tends to bring out our emotional side. Most of these emotions lead us down paths that result in poor investment decisions. While it might seem easy to dismiss the role of our emotions during times like these, the power of emotions can quickly overshadow a more logical approach to investment decisions.
The key for investors is to stay focused on the long term. Before we react emotionally to short-term market gyrations, we should ask ourselves some important questions. What is our long-term
goal? Have our goals changed? Was our plan to reach our goals a sound plan? Are there any good reasons to abandon our plan? Once we have asked and answered these questions our decisions are more likely to be driven by logic, not emotions.
Jeffrey C. Hamm is a Financial Advisor with the Navigator Financial Planning Services Program located at Navigator Credit Union. If you have any questions, or would like to provide feedback, regarding the information presented in this article, you may contact Jeff at 228-474-3427.
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