Making Investment Decisions: Evidence Or Emotion?November 6, 2019
By Jeremy Reif, CRPS®, Financial Advisor and Owner of Point Wealth Management
Do you make decisions based on evidence or emotion, information or instinct? Many people believe that some just have a knack for choosing good investments. But in reality, successful investing is much more a science than an art. And emotions can really mess up that science, especially when we aren’t even aware of them.
What Emotional Investing Looks Like
Have you ever been unable to make a decision because you were paralyzed with worry and anxiety about the future? Have you ever wreaked havoc on your budget for the momentary high of acquiring something you really wanted? These are all examples of how we let our emotions rule our daily decisions.
And unlike decisions about what to eat for lunch, what we do with our money can have long-term consequences. For example, you are tempted by the “next greatest investment” that you can only be a part of if you rush to get on board. Or you panic during a market downturn and sell off stocks only to lose when the market eventually rebounds, throwing off your entire retirement plan. Jumping into things or making split-second decisions without the right information is a bit like gambling in Vegas; the payoff could be significant, but so could the loss. A prudent investor will turn away from spur-of-the-moment trends and seek out solid, proven investments with consistent returns. They’ll weigh the risks and make a decision based on evidence.
Many of us claim we aren’t risk-takers, but we define risk incorrectly. We think avoiding risk means avoiding anything we can’t guarantee or can’t control the outcome of. But most proficient investors aren’t afraid to take a risk, they’re reluctant to accept a loss. There is a difference. The first step in establishing how much risk you can handle is by determining what you’re willing to lose. The second step is to always bear in mind the final outcome. If taking a risk could help you retire 5 years sooner, would you take it? What if the loss involved working an extra 10 years before retiring; is it still worth the risk then? By weighing both the potential gain and the potential loss while keeping your final goals in mind, you can more wisely assess what risks you are willing to take with your money.
Timing The Market And Playing The Game
If only we could know what’s coming. Some investors attempt to predict the future based on the past. And while historical data can give us a framework for the future, we all know that just because a stock rose yesterday, that doesn’t mean it will rise again today. Unfortunately, we may know this in our head, but we often shrug off this knowledge in favor of hunches.
Gut-driven investors tend to pull out of investments the moment they lose money, then invest again once they feel led to do so. While they may do some research, they ultimately act on impulse, possibly leading to huge losses.
Then there are investors who are faithfully saving and letting their investments work for them, but then experience a life event, such as the birth of a baby, marriage, or death, and get a renewed interest in their portfolio. Research shows that people are more likely to ignore long-term consequences when making decisions under stress, (1) so it’s no surprise when they begin to second-guess the effectiveness of their long-term plan and the strategies chosen just for them. The more often they invest in response to short-term needs, the more incoherent their supposed strategy becomes. If the financial changes they make are dramatic, it can lead to financial catastrophe.
Keys To Success
It’s not easy to control our emotions, especially when it comes to money. But there are a few tried-and-true ways to use your behavior to help your investments instead of hurting them:
- Keep a long-term perspective. The markets fluctuate every day. You’ll only cause yourself undue stress and make emotional decisions if you monitor your performance and adjust your investments every time something unexpected happens. It’s more important to maintain a long-term view and stick to a disciplined approach, seeking out investments with the potential for consistent returns.
- Rebalance to maintain proper allocation. Many times, there is no need to fix what isn’t broken, but major life events or drastic market movements can throw off your ideal asset allocation. Setting a habit of reviewing your portfolio and rebalancing your investments can help you rest easy when life throws a curveball your way.
- Get An Unbiased Second Opinion. No matter what type of decision you have in front of you, it’s always a good idea to run it by someone who isn’t as emotionally invested as you. Enlisting the assistance of a qualified financial professional and relying on their skill and expertise can ensure that your investment decisions are based on facts and suited to your long-term objectives rather than your ever-changing emotions or short-term needs.
Your Financial Partner
At Point Wealth Management, we want to help you make smart decisions about your money. We believe that knowledge is power and the foundation for wise decision-making. If you are ready to break free of emotional reactions and make sound choices that will help you pursue your goals and avoid costly mistakes, schedule a call and meet me virtually for a no-strings-attached conversation!
About Jeremy Reif, CRPS®
Jeremy Reif is an independent financial advisor with more than a decade of experience in the financial services industry. He is also the owner of Point Wealth, LLC, an independent financial planning and investment management firm. With advanced credentials and training in retirement planning and financial planning, Jeremy focuses on helping individuals and families pursue financial independence. Regardless of the services he’s providing, he focuses on talking openly about financial planning, the industry, common questions about retirement planning, and more to help everyday investors gain more confidence in their financial opportunities. Based in Wausau, Wisconsin, Jeremy serves clients throughout the state and can work virtually with clients throughout the country. To learn more, visit http://pointwealthmanagement.com and connect with Jeremy on LinkedIn.
Investment Advisory Services offered through Retirement Wealth Advisors, Inc. an SEC Registered Investment Advisor.
Securities offered through World Equity Group, Inc. member FINRA and SIPC, a Registered Investment Adviser
Point Wealth Management and Retirement Wealth Advisors, Inc. are separate entities and are not owned or controlled by World Equity Group, Inc.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.
The opinions expressed by Jeremy Reif are not necessarily those of Retirement Wealth Advisors, Inc. or World Equity Group, Inc. and are subject to change.
The information in the newsletter is not intended to be investment advice or to predict future performance. Past performance does not guarantee future results. Consult with your financial professional before making any investment decision.