“And every day, the world will drag you by the hand, yelling, “This is important! And this is important! And this is important! You need to worry about this! And this! And this!” And each day, it’s up to you to yank your hand back, put it on your heart and say, “No. This is what’s important.” – Iain Thomas
It’s helpful to remember that emotions greatly influence our investment choices. Still, it’s even more beneficial to identify how and articulate the kind of emotional influences we might be inclined to follow blindly. Some may not panic when markets are volatile, but new opportunities could easily sway them. For others, they can stick with their choices, regardless of any dangled carrots, but should the valuations drop, panic can persuade them to sell low and buy high.
These are only two ways to articulate emotional influence, but both make it easier to identify types of market behaviour and sentiment that could negatively influence our investments.
If we dig a little deeper, performance chasing can be at the root of both. The reason for this is because performance on our investments will look different to all of us. When we underestimate the risks associated with a particular investment, we can base our performance expectations on invalid metrics.
If the time horizon doesn’t match our expectations, or the fund growth is not aligned with the path we anticipated, we can quickly begin to feel that we’ve made a mistake and try to fix it as swiftly as possible. Feeling like we’re wrong is not a great feeling; it’s uncomfortable and unsettling. These are not the typical fear-and-greed knee-jerk emotions we often read about; they’re more subtle and more complex to engage with because they stem from a sense of dis-ease.
Amy Morin, editor-in-chief at VerywellMind.com, says: “I think a lot of people tend to equate their self worth with their income, or they think that social media, these days puts pressure on people to make it look like they’re doing better than they are. And because of that, people feel bad,” said Amy Morin, Verywell Mind’s editor-in-chief.
All of these emotions, whether euphoric highs, desperate lows or the seemingly sensible need to constantly feel comfortable, are sparked into flame when we consider the ongoing performance of a fund or asset. However, current research shows increasingly that our end goal needs to be far more important than the ongoing performance of an investment that could turn tomorrow.
At WellsFaber, we look at two key strategies to help us manage these emotions (because we will never be able to avoid the emotions); these are dollar-cost averaging and diversification.
Dollar-cost averaging is a good strategy for investors with lower risk tolerance, wherein an investor allocates a set amount of money at regular intervals. This approach avoids putting a lump sum of money into the market all at once, which runs the risk of buying at a peak and can be unsettling if prices fall.
Diversification is the process of buying an array of investments (not putting all our eggs in one basket) and can also help diminish the emotional response to market volatility. Diversifying a portfolio can take many forms, such as investing in different industries, geographies, types of investments, and even hedging with alternative strategies like real estate and private equity. Our team spends much time investigating and performing due diligence on such alternatives.
Often, to earn higher returns, we need to be able to do the opposite of what feels comfortable. If you’re feeling a little uncomfortable in your investments, please reach out and let’s chat soon!