Vail Daily column: Avoid emotional investment decisions
What’s the biggest obstacle to your ability to invest successfully? Is it the ups and downs of the markets? The fact that you weren’t born rich? Actually, the chief hurdle you face is something you control: Your own emotions. Emotions can lead to a variety of ill-advised investment behaviors, such as these:
Cutting losses: Declines in the financial markets can lead some investors to try to “cut their losses” by selling investments whose price has declined. Yet when prices have dropped, it may actually be a good time to buy investments, not sell them, especially when the investments are still fundamentally sound.
Chasing performance: In the investment world, the flip side of “fear” is “greed.” Just as some investors are propelled by fear of loss, others are motivated by quick, big gains. They may pursue “hot” investments, only to be disappointed when the sizzle quickly fizzles. Instead of trying to score that one big winner, you may be better off spreading your investment dollars among a range of vehicles — stocks, bonds, government securities, certificates of deposit and so on. While diversification can’t guarantee a profit or protect against loss, it may help reduce the impact of market volatility.
Focusing on the short term: When the market is down, you might get somewhat upset when you view your monthly investment statements. But any individual statement is just a snapshot in time; if you were to chart your investment results over a period of 10 or 20 years, you’d see the true picture of how your portfolio is doing. Don’t overreact to short-term downturns by making hasty decisions. Instead, stick with a long-term strategy that’s appropriate for your goals, risk tolerance and time horizon.
Heading to the investment sidelines: Some people get so frustrated over market volatility that they throw up their hands and head to the investment sidelines until “things calm down.” If you jump in and out of the market to escape volatility, you may take on an even bigger risk — the risk of losing some of the growth you’ll need to reach your goals. Consider this: If you had invested $10,000 in a package of stocks mimicking the S&P 500 in December 1979, your investment would have grown to more than $426,000 by December 2013. But if you had missed just the 10 best days of the market during that time, your $10,000 would only have grown to less than $206,000, according to Ned Davis Research, a leading investment research organization. The bottom line? Staying invested over the long term can pay off.
Our emotions are useful in guiding us through many aspects of our lives, but when you invest, you’re better off using your head — not your heart.
This article was written by Edward Jones for use by your local Edward Jones financial adviser. Edward Jones does not provide tax or legal advice. Tina DeWitt, Charlie Wick, Kevin Brubeck, Dolly Schaub and Chris Murray are financial advisers with Edward Jones Investments. They can be reached in Edwards at 970-926-1728 or in Eagle at 970-328-4959 and 970-328-0361.