Emotional Investing Could Hurt Your Retirement Plan
Economic conditions are difficult to predict, and when combined with a pandemic or inflation concerns, it’s even more difficult. It’s human nature to experience fear and uncertainty, especially during times like these. Investing and emotion go hand-in-hand, making it natural to make big financial moves. But experts warn against this. “Although often easier said than done, I encourage my clients to NOT make any major financial decisions based on emotions.” Jeff Boessen, CFP®, Senior Vice President and LPL Financial Advisor said. When it comes to your retirement plan, here are a few ways to avoid emotional investing.
How to Overcome Emotional Investing
During volatile times, many investors get spooked and begin to question their investment strategies. Use these tips to stay on-track:
Tune out all the noise
One emotional bias is called “herd behavior,” which is the behavior of individuals in a group, acting collectively. Be sure to focus on your retirement plan, and not be distracted by ‘following the crowd.’ Often, these type of ‘herd investors’ will buy stocks at a higher price, and end up selling for a lower price. If you hear of market declines, it’s best to not make any big financial moves. The same is true if you have a 401(k) – try not to react to any ‘buzz’ you hear, and contact your financial advisor. Your advisor will go over your plan with you, and offer adjustments if needed to your long-term strategy.
Remember, we invest for the long term
Speaking of long-term strategy, Boessen continued, “For retirees, oftentimes a balanced portfolio consisting of both near-term liquidity availability, and longer-term growth assets, is advisable to allow one to better weather the financial storms at hand.” Stay invested, follow your current long-term strategy, and ignore short- term fluctuations. Investing for the long-term can help manage volatility, and gives your money more time to grow. In addition, selling a security within one calendar year of purchasing it, can result in a higher capital gains tax.
Be aware of your own risk tolerance
Your risk tolerance is your ability and willingness to endure potential losses in your portfolio because of market swings. There are a few different types of risk:
- Market risk – is when the investment could lose value due to falling prices caused by outside forces, like economic factors, or political and national events.
- Interest rate risk – is the risk an investment’s value will decrease due to rising interest rates.
- Inflation risk – is the chance an asset will not keep up with inflation, or the rising cost of living.
- Liquidity risk – is the risk associated with not being able to cash-in or sell quickly if you need access to the funds.
- Risks associated with international investing – these can include unstable economies, additional taxes, political upheavals, and currency fluctuations.
Develop a diversified investment strategy with your financial advisor
It’s a good idea to avoid being overly concentrated in one sector of the economy or type of investment. There is not a “one size fits all” strategy when it comes to investing and your specific portfolio. While diversification does not completely protect against market risk, investing in different areas that would react differently to the same event can help maximize returns. Remaining invested in a diverse portfolio can have long-term benefits, as well as help you avoid an emotional response to a down market.
When it comes to your investment strategy, meeting annually with your financial advisor can help account for any necessary changes. As always, we’re here to guide you through creating a personal financial plan. That’s why we offer no-obligation initial consultations. These meetings provide an opportunity for you to get to know the person who will be advising you, and just as importantly, for us to get to know you.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against a loss. This material is intended for informational purposes only, and should only be relied upon when coordinated with specific individualized professional advice, as individual situations will vary.