Understanding the Emotions of Investing

Press Release (ePRNews.com) - DEWITT, Mich. - Feb 21, 2017 - No one can control the stock market or exactly how an investment will perform – and feeling a lack of control can lead to making emotional and impulsive investing decisions.

So even though we are trying to avoid potential declines, the biggest risk to our investment success may not be market fluctuations themselves – it’s our reaction to these fluctuations. However, if we work to identify and understand emotional investing behaviors, we can help to avoid making these mistakes in the future.

Three Common Emotional Investing Mistakes:

1. Trying to Time the Market.

In order to reach your long-term financial goals, it’s important to stay in the game – not head for the sidelines. While political uncertainties or market fluctuations can make it tempting to get out and wait for things to get better, it’s nearly impossible to successfully predict when to exit and re-enter the market. Unfortunately, many people tend to invest based on their emotions, selling after declines and then missing positive market moves.

In a study observing investor behavior,1 investors with a balanced portfolio of 65% equities and 35% fixed income investments over the past 20 years would have averaged about an 8.6% return per year. However, the average U.S. investor received about a 3.7% return, due to his or her investing behavior, because they tried to time the market, buying when they felt good, and selling when they felt bad.

2. Chasing Performance.

Investors are also hearing about the latest “hot” investment, which can lead them to chase performance- buying what just did well, or selling what is currently out of favor. This type of emotional response can lead to buying high and selling low.

Investments tend to outperform and underperform at different times, which is why diversification is so important. Owning a variety of asset classes and investment types can help smooth out the ups and down of the markets, setting the stage for a better long-term experience.

3. Focusing On the Short-term.

Understanding that market declines, while uncomfortable, are normal will help you keep realistic expectations for investment performance. The stock market averages a 10% correction every year,2 so it’s important to measure performance as progress toward your long-term goals, not short-term market distractions.

Keeping the Emotions of Investing In Check

Avoiding the impulse of emotional investing requires discipline and perspective – having a clear picture regarding why you are investing, as well as how your decisions may affect your ability to reach your long-term goals. So if you feel your emotions start to get the better of you, take a step back and talk with an Edward Jones financial advisor – working together, you can stay focused on reaching your financial goals.

Important Information:

1Source: DALBAR, QAIB 2015; Edward Jones estimates. Annualized return for the past 20 years ending 12/31/14. Assumes initial investment of $65,000 in equity and $35,000 in fixed income. The Equity benchmark is represented by the S&P 500. The Fixed Income Benchmark is represented the Barclays Aggregate Bond Index. Returns do not subtract commissions or fees. This study was conducted by an independent third party, DALBAR, Inc., a research firm specializing in financial services. DALBAR is not associated with Edward Jones. Past performance is not a guarantee of future results. Individuals cannot invest directly in an index.

2Source: Ned Davis Research. Further distribution prohibited without prior permission. Copyright 2015 © Ned Davis Research, Inc. All rights reserved. Past performance is not a guarantee of future results. An index is not managed and is unavailable for direct investment.

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives, risk tolerance and financial situation.

Source : Edward Jones

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CATEGORIES : Investments
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