Managing your personal finances can be a daunting task, and one of the most difficult aspects is keeping your emotions out of your investment decisions. Watching your portfolio go through uncertain market conditions can be difficult for even the most experienced investor. We believe focusing on your long-term financial goals rather than on market volatility can help avoid making emotional investment decisions that could harm your long-term returns.
Though market timing may seem simple to some investors, attempting to time the market and avoid market volatility is complex and incredibly difficult. Whilst it is certainly difficult to endure a market downturn, trying to get out of the market could mean potentially missing some positive market returns if you don’t get it right. If your long-term financial goals include long-term portfolio growth, this kind of mistake can have lasting effects on your ability to reach your long-term goals.
Studies have shown investors dislike losses far more than they enjoy gains.* In the realm of behavioral finance, this phenomenon is called Myopic Loss Aversion. This mindset can cause investors to have emotional reactions to market developments and potentially make poorly timed trades if they get distracted from pursuing their long-term investment goals. A downward moving market environment can breed fear, causing even the most disciplined investors to make emotional decisions. If your long-term investment goals require growth, one of the biggest risks you might face is missing any of equities’ long-term returns. If you require equities to reach your long-term investment goals, deviating from that plan could increase your risk of not meeting your goals.
We believe time in the market matters more than timing the market. Said another way, we believe you should focus on investing for longer time periods rather than on attempting to side-step market volatility. If your goals require equity-like returns, you may be better off staying invested as equities’ long-term rise includes all previous market downturns.
While fear can cause investors to make emotional decisions, so too can greed. At times, you may be tempted to seek higher returns, especially if those in your social group are bragging about how well their portfolios are doing. However, this practice can be dangerous as “hot” securities or sectors that have recently performed well may start to underperform the market just after you buy them.
Some investors prefer certain areas of the market, such as their home country or the Technology sector. However, categories tend to rotate in and out of favour, and no one category—based on company size, sector or geographic region—leads for all time. Investors sometimes lose sight of their long-term financial goals and investment strategy to pursue better returns in “hot” categories, which could open them up to more risk. This practice often introduces concentration risk—the risk of investing too heavily in one company or area of the market that responds similarly to market developments. If that one area of the market struggles, then your portfolio may suffer as well. Sticking with a personalized portfolio and investment strategy tailored to your situation and long-term investing goals is likely a better solution.
Overcoming the emotions that come with managing your personal finances can be difficult, and it certainly is not for everyone. Luckily, you don’t have to do it alone. If you would like to learn more about how Fisher Investments Canada can help you reach your financial goals, contact us to speak with one of our qualified professionals or download one of our educational guides today. Whether you are wondering about investment counselling, retirement planning, financial planning or more general financial advice, we think we can help.
Source: “Quantitative Analysis of Investor Behavior, 2018,” DALBAR, Inc. www.dalbar.com. FactSet, as of 06/04/2018. Barclays US Aggregate Government Treasury Total Return Index from 31/12/1992–31/12/2017. The characteristics of the above study are shown in US Dollars. Currency fluctuations between the dollar and pound may result in higher or lower investment returns, and other noted characteristics.