Avoid emotional investing
Strategies like diversification, rebalancing and dollar-cost averaging are investment disciplines that allow you to make “non-emotional” decisions about your portfolio. That is not always easy to do when markets are fluctuating the way they have been in recent months. This illustration shows how emotions parallel the ups and downs of the markets. Where are you on the emotional rollercoaster?
Emotions driven by expectations
Expectations of how the market or your investments will perform can drive emotions that affect decision-making. Emotions, in turn, can drive behavior.
As the market rises, optimism about the markets grows to excitement, and sometimes outright euphoria. A similar pattern occurred in the late 1990s, when the “dot-com bubble” caused a huge spike in the market and investors put much of their money into stocks. But when the market begins to decline, emotions ranging from anxiety to depression follow the market to its low point. It is difficult to know when the exact bottom occurs, but at some point optimism returns and the cycle repeats.
Next: Steps you can take now
Learn what you can do now based on your financial goals and investment time frame.
How long do you have before you retire?
Diversification helps you spread risk throughout your portfolio, so that investments that do poorly may be balanced by others that do relatively better. Diversification, asset allocation and dollar-cost averaging do not guarantee overall portfolio profit or protect against loss.
