Take the emotion out of investing

A common mistake is to make decisions based on emotions. In good times, investors are excited, they want to invest more and often “buy high”. When markets turn negative, investors become fearful and decide to cut their losses and “sell low”.

The investing emotional roller coaster shows what an investor may experience as their investment rises and falls.

This chart shows how market performance, in a rising market or declining market has an influence on investor’s behaviour.  During periods of market volatility, investors become “emotional” which can lead to irrational decisions which will have negative consequences to their investment portfolio.   When the market starts to rise, the investors are feeling optimistic and excited.  Once the market is at an all-time high or peak, the investors feels euphoric and confident, often making  their initial investments at this point.  Once it peaks, the market may starts to become volatile and declines in value, investors start to feels some sense of fear and anxiety. But they may still hold onto their investments, as they convince themselves they are “long term investors” while shrugging off short-term volatility. But as the market continues to decline and enters into a ‘bear’ market which is defined as being a drop of 20% or more from its 52 week peak, investors starts to feel panic and capitulation has set in, investors feel all hope is lost.  It is generally at this point is when many investors start to sell their investments at prices well below their original acquisition price.  Over time, the market starts to rise, the investors are feeling optimistic and excited.  The cycle starts again.   The key lesson is investors need to not react emotionally to market volatility and make irrational decisions. In doing so, it will have negative consequences to their investment portfolio.

The key is to stay disciplined and committed to your long-term investment plan to avoid riding the emotional rollercoaster. There are ways to manage emotions to help reduce uncertainty in the markets: diversifying, long-term investing and using the dollar-cost averaging strategy. Your advisor can help provide the knowledge you need to help you stay focused on your long-term goals.

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Solutions Magazine

Solutions Magazine

Manulife Investment Management

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