When something troubling happens in the world (think Brexit, Donald Trump’s inauguration, etc.), investors panic. It’s a natural reaction. People are unsure of how global economies will respond, so they start parking their money on the sidelines of the market.
While it can be difficult to feign disinterest in global events when it comes to your investments, the best thing you can do for your portfolio in times of uncertainty is to leave it alone. And while keeping your emotions in check as an investor can get tough, it’s necessary in achieving your financial goals.
When the market is reacting to less than ideal events, follow these tips to help you keep your emotions out of investing:
Stick to your investment plan
An investment plan guides you in staying on track with your goals and helps you keep a clear head when your portfolio is enduring some short-term market fluctuations. It acts as a point of reference for where your portfolio should be at any given time, and something to fall back on when your worries might be getting the best of you.
Your plan also indicates when your portfolio should be rebalanced. If you’re working with an investment advisor, they’ll rebalance your portfolio whenever it falls a little too high or a little too low from where it’s supposed to be. This ensures you’re always on the right path to reaching your financial goals, even when things in the market are looking a little hairy.
It’s important to remember that depending on the level of risk you’ve assumed, the degree in which your portfolio fluctuates will vary. But by keeping a diversified portfolio and making sure you’re comfortable with your risk tolerance, you’ll minimize bad risk and be able to keep your emotions out of the market without making any investing mistakes that could have been avoided.
Remember the benefits of investing for the long-term
Investing is more of a marathon than a sprint. When your goal is 10-30 years away, short term fluctuations are expected. Certain events may trigger dips in the market, but these dips are temporary and won’t affect the long-term performance of your portfolio.
There are many benefits to investing for the long-term, including the compounding interest that has a positive effect on your savings over time, and dollar-cost averaging. Dollar-cost averaging happens when you regularly contribute a fixed amount to your investments, usually through a pre-authorized contribution. When you do this, you end up buying more units when costs are low, and less units when costs are high. The result? Your average cost per unit is lower than the average price per unit.
So when your emotions make you want to pull your money out at the sight of volatility, think about how much your portfolio would benefit if you ignored that impulse, let your money compound, and continued contributing to your goals.
Talk to your advisor
Working with an advisor can help you keep your emotions in check. They’ll be able to guide you in making investment decisions that benefit you and your goals, rather than making decisions based on how you feel about current events that are temporarily affecting the market. Reaching out to someone who has no personal attachment to your investments can help you regain some perspective, calm your nerves as an investor, and provide you with some sound advice on what to do when your portfolio is experiencing some volatility.
Ride it out
Remember that while initial reactions may seem overwhelmingly negative, they’re generally temporary. In June, the final Brexit vote caused markets to drop dramatically, but they eventually recovered. And although global concern for Trump’s first week as POTUS seemed to be all people could talk about, U.S. employment rates were higher than ever before and developing economies were benefiting from globalized trade. The initial reaction may be to panic, but once the air clears, things aren’t as bad as they seem. Keep this in mind and wait for the dust to settle before making any hasty decisions.
When market volatility has you concerned about your investments, remember that an initial sense of panic is expected, but not necessarily as bad as it seems. Review your investment plan, talk to an advisor, and keep a clear head. Your emotions and investments are not friends, so keep them separate.