How to Prevent Emotions from Guiding Investment Decisions

November 2023coins with emoji faces

Investing is a great way to make your money grow, but with volatile markets and an unpredictable world, it can be stressful to watch your portfolio weather the storm. However, making hasty, emotionally charged decisions can make this tough situation worse — so here are some tips for keeping cool when it comes to managing your investments.

Dollar-cost averaging

Dollar-cost averaging is one of the most common and effective ways to hedge against emotional investing. This strategy involves investing a set portion of money at regular intervals. A paycheck-deducted contribution from an employer-sponsored 401(k) program is an example of this strategy. The money goes towards a pre-established investment strategy — and you don’t have to stress yourself out making the decision on how much (or how little) you invest every time. Since these programs often offer diversified portfolios, you also won’t have to worry about allocating where every dollar goes. Investopedia contributor Kristina Zucchi recommends dollar-cost averaging because it works under any market conditions. She explains that in a bear market, your dollars are purchasing shares at lower prices. And when the market is bullish, your investments will be earning more while your fixed contributions purchase fewer shares.

Diversify your portfolio

It’s normal for investments to fluctuate in value. If you have all your eggs in one basket, it’s tough to separate your emotions when you see your chosen investment taking a downturn. To combat this strain on your nerves — and your portfolio — consider diversifying your investments.

Zucchi explains that a diverse portfolio can provide financial and emotional reassurance in the face of market volatility, since it’s rare for all types of assets to endure a simultaneous downturn. And by diversifying your assets, you can make up for losses in some investments with profits in others. Zucchi suggests broadening your investing horizons by picking up assets in various industries and locations, along with alternative forms of investment, like real estate.

Don’t rush your decision-making process

While it may be tempting to follow the herd or succumb to the fear of missing out, rushing your decision-making process can lead to negative outcomes for your investments. Before making any major decisions, Wright State University Raj Soin College of Business assistant professor John B. Dinsmore suggests making a list of the benefits and drawbacks of each decision you’re considering. By weighing out the pros and cons, you may be able to come to a more rational conclusion than if you’d acted on gut instinct.

Don’t risk more than you can afford

If you see an asset skyrocketing in value, you may be tempted to get in on the action. It may seem like every dollar you don’t sink into the investment is a lost opportunity to grow your earnings. But that isn’t necessarily how reality will play out. Instead, take time to think about what would happen if your new investment collapsed. Consider how much you can risk before you invest, suggests certified financial planner Miguel Gomez. If your life’s savings or next month’s rent isn’t riding on the success or failure of your investments, it’s easier to keep an even keel.

Looking for more advice on smart investment strategies? Consider talking with one of Waukesha State Bank’s investment professionals.

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