Do you ever find yourself reacting to market ups and downs? Do you have the urge to jump in and out of the market, depending on how your stocks are doing on a particular day? Do you ever feel like following the stock picking advice of the latest "market guru" in the financial media?
If so, you're not the only one. But reacting to market volatility, attempting to pick stocks, and market timing won't lead to peace of mind... or efficient investments. Rather, focus on using some tips and tricks from Psych 101 in order to turn yourself into a better investor.
Passive vs. Active Investing: Your Financial Strategies
It's so easy to equate activity with progress and in many facets of life, the two do seem to go hand in glove. But when it comes to investing, taking a passive, long-term approach is actually more effective, as empirical study after empirical study indicates.
But simply leaving your portfolio alone -- and letting it grow -- just isn't as glamorous or exciting as stock picking or market timing, so it's easy to see why many investment professionals and the financial media tend to push the active approach. Unfortunately, making too many trades tends to simply reduce your returns as each trade can cost you in fees and expenses. Also, unless you have the world's only authentic crystal ball at your disposal, you simply can't predict the market's movements with any accuracy.
Recency Bias: Leave it out of Your Strategic Financial Planning
Perhaps that particular stock or fund has been going up lately. Shouldn't you jump on it? Or maybe a stock in your portfolio isn't performing very well. Is it time to sell? If these thoughts are running through your head, you've got a case of recency bias.
Assuming that a current trend will continue is known as "recency bias," and it's why far too many investors make decisions based on the belief that the market will look the same tomorrow as it does today.
Recency bias causes many investors to focus on short-term trends -- which are just that, short-term -- rather than focusing on long-term corrections. Regardless, you can't predict the future based on the past. Instead, focus on achieving proper asset allocation through diversification... and sticking to the long-term financial strategies you've developed with your trusted wealth advisor.
Your Comprehensive Financial Plan: Consider Your Risk Tolerance
When you're engaging in the wealth planning process, it's important to be realistic about your tolerance for risk. You may believe you can tolerate anything -- but the market's ups and downs make it easy to react emotionally to volatility.
It's understandable; after all, it can feel like it's your financial future in flux. But learning to handle these emotions is an essential part of the investment process, and something your wealth advisor can help you overcome. Remember: when you're in the heat of the moment, that's not the right time to be making major financial decisions.
Plus, humans are hardwired to react to emotions and stress by taking action. Whether you're feeling fear or elation, these emotions trigger changes in your brain chemistry that make you want to act.
By recognizing these feelings for what they are -- automatic physiological responses -- you can take control of your emotions, remain calm and stick with your comprehensive financial plan. Taking a minute to remember your goals and objectives will help you find peace of mind and resist the urge to react.