There are many factors that may have you biting your nails over your investment portfolio: recent market volatility, a likely lowering of Fed rates, and, of course, an upcoming presidential election.
While there are some areas of life where involving your head and heart makes sense, investing is not one of them — in fact, said Experian, “basing investing decisions on emotion can lead to disappointing results and long-term damage to your financial portfolio.”
Of course, it is totally natural to feel fearful about big dips in stock prices or extra enthusiastic about an investment opportunity. But what is critical is not letting those feelings dictate or cloud your subsequent investment decisions. Read on for some tips on how to make that happen.
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1. Have a long-term goal in mind when investing
“Understanding why you’re investing in the first place can also help you to stay calm when markets get crazy,” said Bankrate. Not only will this soothe your worries when they start to crop up, it will also help you invest your money in such a way that you won’t need to feel panicked about market volatility.
For instance, said Bankrate, “if you know that the money you need for emergencies and the next few years is only in safe investments, then you’re less likely to panic when stocks fall because stocks should only be held in a long-term ‘bucket’ such as retirement.”
And while some of your investment objectives will be shorter term, there is a good chance most of them are focused on the long term. In that case, “a ‘buy and hold’ strategy — purchasing and keeping investments for the long term — can smooth over market fluctuations if the assets increase in value,” said Experian.
2. Make sure to diversify your investment portfolio
Diversifying your investment portfolio — meaning “buying an array of investments rather than just one or two securities,” said Investopedia — can also help mitigate your response when the market takes a tumble. Because “there are only a handful of times in history when all markets have moved in unison and diversification provided little protection,” that means that “in normal market cycles, using a diversification strategy provides an element of protection because losses in some investments are offset by gains in others.”
To properly diversify, you want to aim to invest “across asset classes” as well as “across multiple industries, locations, company sizes and types of securities,” said Experian. Buying into funds, such as “mutual funds, exchange-traded funds (ETFs), and index funds, can help diversify your investments.”
3. Try the practice of dollar-cost averaging
Another effective approach to investing that will make the whole experience feel less emotional and unpredictable is dollar-cost averaging.
With this strategy, you invest an equal amount of money “at a regular predetermined interval,” regardless of market conditions, said Investopedia. As a result, “in a downward trending market, investors are purchasing shares at lower and lower prices,” while “during an upward trend, the shares previously held in the portfolio are producing capital gains and, since the dollar investment is a fixed amount, fewer shares are purchased when the share price is higher.”
What is helpful about this investing approach is you are not reading market conditions to try to decide what moves to make, but rather consistently investing in the same way regardless of what current conditions are like. “When you don’t have to think about making an investment, you’re less likely to let emotions drive your decision-making,” said Experian.
4. Hire a financial professional to work with
Bringing in a neutral and highly skilled third-party, such as a financial advisor, can also help prevent your emotions from sending your portfolio off-track. “An advisor can provide an objective perspective and guide you in making informed choices based on your long-term goals rather than emotional impulses,” said SmartAsset.
You can turn to your advisor to discuss concerns when the market gets volatile, or ask them to gut-check you before making any moves that may be more driven by feelings than logic.
