Did you ever bet on a “Sure Thing” – and lose? Have you recently jumped on a market trend, only to miss the big return that “everyone else” seemed to enjoy? Do you sometimes “go with your gut,” only to realize you were not really making a smart choice – you simply had indigestion? How’s that tummy feeling now?
A personal finance planner is exactly what you need to help you avoid emotional responses to an irrational market.
“Yes, we live in trying times, and investors should be concerned about a feeble economy and volatile, often irrational markets. But now more than ever, we need to shunt aside emotions and approach our investments with logic and detachment, and take a long-term view,” writes Bob Frick, Senior Editor, Kiplinger’s Personal Finance in a timeless Kiplinger’s personal finance article “How to Be a Better Investor.”
One of the most common and damaging mistakes investors make is chasing “winning investments” – and “selling losers.” In other words, an emotional response to irrational markets can only make that indigestion worse.
The impact of buying low and selling high is demonstrated in market-research firm Dalbar’s annual study that compares actual investor returns with stock market returns. For the 20 years ended 2010, the stock market (as measured by the S&P 500) returned 9.1% per year as compared with 3.8% per year for investors – a difference of 5.3% per year. In dollar-terms, that means an investor starting with $100,000 twenty years ago would have $280,910 compared to $570,814 for the stock market.
Clearly, patience is a virtue when it comes to your investment strategy. Like so many things, the day-to-day vagaries of market forces can have a profound effect on your investments however, when the long-term view is considered, it becomes obvious that an emotional response to these short-term fluctuations can have a very negative effect on your returns – and your investment goals.
“The best way to deal with the dangers of return-chasing is simple: Build a diversified portfolio and rebalance it regularly. Rebalancing forces you to cut back on investments that have been performing relatively well and to buy those that have been relative laggards—in other words, it forces you to buy low and sell high.”
To avoid this emotional response to market trends and fast-breaking financial headlines, a personal finance planner and investment advisor can be of significant value. By providing perspective and accountability, your personal finance planner will help you maintain your commitment to the goals you’ve set for yourself.
If you would like support and accountability with your investment decisions, Tamarind Financial Planning is here to help you, with proven individual financial planning strategies and personal investment management advice.
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