We all know that emotions and investments don’t mix too well. I like what Warren Buffett said regarding emotions and investing: “Be fearful when others are greedy; be greedy when others are fearful.” When people are jumping on the investment bandwagon left and right because returns look great, you should be cautious of following suit – easier said than done, right. The same line of thinking applies when the market is tanking; Warren considers this prime buying season. Unfortunately the majority of investors don’t pick up on this until it’s too late.
The truth is, most investors hurt themselves by letting emotions creep into their investment decisions. I ran across a fascinating tool the other day by Vanguard. It’s an interactive chart that shows the relationship between emotions and investing.
In this screenshsot, you can see the difference between what the market returned (red) and what your return would be (black) if you made the decision to jump in and out of the market based on your feelings. The end result is staggering.
Staying the Course
It’s easy to see how a short term decision can really negatively impact your long term results. That’s why it’s so important not to let those impulse decisions to buy or sell investments guide your portfolio.
Obviously, being impulsive when it comes to investment decisions is a no win game. On the other hand, having an apathetic outlook can leave you unprepared in your later years because of a lack of planning. You don’t find too may investors who would quickly claim either one of these extremes. Most would like to think they fall in the gray area – the ‘stay the course’ or ‘buy and hold’ approach. I wish the majority of investors would avoid making market decisions with emotions, but I’m not confident that it is. It just takes one dip in the economy to test investors and I hope you don’t make an extreme decision based on emotions.
How do you overcome emotional investing? Not looking at your statement? Buying index funds? Share your thoughts or ask a question in the comments!