4 Easy Tricks to Avoid Getting Emotional About Your Investments

Whether you’re new to the stock market or a seasoned investor, keeping your emotions in check can be challenging. When you hear unpleasant news about a company in which you’ve invested, your first instinct may likely be to sell your shares. Yes, its stock may drop in the following days or weeks, but when it comes to the stock market, it’s important to think long-term. Selling your stock now based on an emotional response could mean missing out on significant earnings years or decades down the line. Before you risk that, we offer four easy tricks you can use to help avoid investing based on your emotions.

Trick 1: Find a Behavior Coach

Working with an advisor can be your first line of defense against behavioral investing. Some investment advisors or financial planners may act as behavior coaches. In doing so, they can prepare you ahead of time to react calmly in times of market change. If you tend to take an emotional approach to your investment decisions, you may find an extra pair of eyes on your portfolio worthwhile.

Trick 2: Put Your Plan In Writing

Do you have a favorite chocolate chip cookie recipe? You’ve used the recipe so many times that it is practically etched in your brain. But let’s say you bake the cookies and get a bit distracted. With your focus elsewhere, you may start to question what you thought you definitely knew. Was it ¾ or ½ cup of sugar? You swear that you bake the cookies at 375 degrees, but now you can’t remember how long it takes. Before panicking, you grab the cookbook and double-check the recipe. Within minutes, you regain complete peace of mind that you have added the right amount of sugar and set the timer correctly.

Think of your investments in the same way. Writing your investment plan can give you that same reassurance when doubts arise, and your emotions begin to take over. If you’ve made a proper, thoughtful investment plan, you’re likely prepared for the good and the bad. Seeing your plan in writing can provide relief that you’re doing the right thing.

Trick 3: Forget About Your Portfolio … For a Bit

A study conducted in 1979 introduced the “loss aversion” principle. This principle is used to describe instances where the weight of a loss is greater than the benefits of a reward.¹ For many investors, this principle can hold true; they feel much worse about a loss in the value of their stocks than they feel happy when those stocks perform well. If this sounds like you, it may be time to take a step back from your portfolio. While regular reviews and rebalancing are often necessary, you may want to resist the urge to check on your stocks too frequently (daily, weekly, or even monthly). With the loss aversion principle in mind, checking too often may lead to more frustration than elation. This can easily entice you to make an emotionally driven decision regarding your investments.

Trick 4: Read Up On Market History

Depending on your depth of investment knowledge, you may already know what a bull market (rising) and a bear market (falling) are. But if you’re aiming to prepare yourself better emotionally, you may want to research what historically occurs in each market type, such as how long the condition tends to last, the trends leading up to the market type, and the recovery time (in cases of loss). Taking a historical view of the market can help you separate yourself and your stocks from the greater picture. This has the potential to make your investment decisions less behavior-based as you become more informed about past trends.

Detaching your emotions from your investments is easier said than done. In some instances, it can be beneficial to take stock of how market changes make you feel. For example, your comfort with a market downturn can help you understand whether your risk tolerance is at the appropriate level. As you tune in to the nightly news or read about your favorite company online, remember to step back and think about your portfolio’s big picture. Doing so can save you from missing out on major investment wins down the line.