4 ways to be a less emotional investor
With Brexit less than six months away, it’s understandable if many people are growing increasingly skittish about what our forthcoming EU departure will do to the value of their portfolios. Uncertainty is, and always will be, hated by market participants.
With this in mind, let’s look at what steps we can take to keep our heads as well as to be expected – not just during crises but on a day-to-day basis.
1. Recognise you’re human
When we buy shares in a company, we hope they will rise in value. When we sell, we are pessimistic on its future (or more optimistic about the prospects of a different business we’re wanting to switch to). Emotion precedes every action in the markets, even when they’re behaving themselves.
And when they don’t, our fallibility is highlighted even more. The idea of remaining ice cool when markets plummet sounds great in theory (and easy to do when we’re in the longest bull market in history) but managing this in practice is very difficult indeed. Bear in mind that many who started investing in 2009 or later have little experience of severe turbulence.
So, rather than deny how emotional investing can be, it’s surely better to regard managing ourselves as important as picking the right stocks from the outset.
2. Remember your financial goals
It’s easy to forget why you’re invested when your portfolio dips by a few percent in a single day, let alone when there’s a looming political event ahead of us.
That’s the rub with investing: there is always something to worry about. That doesn’t mean you should.
If you’re growing your wealth for a retirement that’s still decades away, you don’t need to worry. In fact, if you’re investing for five years rather than five weeks, you don’t need to worry.
You see, equities have outperformed every other asset class over the long term. So, the longer you retain your shares, the greater your chances of emerging richer from your stock market journey.
Resist checking your portfolio every day and sleep easy.
4. Get diversified
The benefits of running a concentrated portfolio aren’t hard to fathom. Just pick the right shares and get rich quick.
While theoretically possible, you probably don’t need me to tell you that selecting only winners is very unlikely. Unless you’re a robot, it’s also a recipe for a stressful life.
It’s far easier to keep your nerve when you aren’t over-invested in any company. If one (or a few of them) fail or experience a sticky patch, the others should be able to take the strain.
Reduce the chances of your emotions getting the better of you by holding a group of stocks diversified by geography and industry.
4. Invest regularly
Staggering your investments over a period of time rather than in a single transaction is never a bad idea. It allows you to buy more of something when it’s cheap and less of something when it’s expensive, usually at very cheap commissions (£1-ish).
But pound cost averaging, to give this process its technical name, also helps preserve your sanity.
While investing at market peaks can still make someone rich over many years, the misery endured from seeing their portfolio covered in red could be enough to convince him/her that investing just isn’t for them. Don’t let this be you.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.