Emotions play an important role in some of the most important decisions we make in our life. But when it comes to investing, emotions can do more damage than good. Here are some 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, some people decide to sell their stock mutual funds. What starts as a few people selling their investments can turn into a panic where everyone decides to sell. 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. 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. 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. 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.
Content developed by CUNA Brokerage Services.
Note: If you need investment help make sure you talk with the Financial Advisors at Truliances.
