Emotion and investing
Investing can be an emotional experience. After all, you’re putting your hard-earned money into investments to meet your financial goals. That’s why it’s important not to let emotions rule your investment strategy.
Focus on the long term
Market volatility is unavoidable. It’s part of normal and healthy market behavior. Just like seasons, markets move through stages of growth. Unfortunately, the timing of those cycles are unpredictable. While dramatic moves in the market can make you question your investment plan, it’s important not to panic.
When the markets fall, history shows they eventually come back even stronger. Focusing on your long-term investment goals can help quiet the media noise around falling markets and help keep you from making rash investment decisions.
Buying low and selling high
The wise investment advice is to buy low and sell high. Yet, studies show the average investor gets excited, jumps on the bandwagon and purchases a stock when it’s performing well (in other words, they buy high). Then, when the price drops, that same investor often panics and unloads the stock (they sell low).
The other problem with buying and selling investments this way is that you could be missing out on potential returns. For example, an investor who stayed invested in Canadian equities over 20 years would have seen their $10,000 investment grow to $35,514 (total return). If that same investor, missed out on the single best week, their $10,000 investment would only have grown to $31,204.
Strategies to avoid emotional investing
There are several ways you can help take the emotion out of your investing.
Understand your risk tolerance
Risk tolerance measures your willingness and ability to handle a loss in the value of your investments due to market volatility. You can determine your risk tolerance using our Investment Personality Questionnaire | 954 KB.Opens in a new window
Create an investment plan
Working with an advisor to build an investment plan that reflects your needs, goals, and risk tolerance is half the battle. The other half is remembering to review it, update it, and most importantly, stick to it. If you develop an investment plan and focus on long-term growth, you’ll be less likely to worry or think emotionally when markets go through short-term changes.
Dollar-cost averaging
With dollar-cost averaging, you invest the same amount of money on a regular basis, regardless of the price of the investment. Over time, investing this way can lower your average cost per unit compared to what you’d have paid if you'd bought all your units at the same time when they were more expensive than the average.
Diversification
You can diversify your investment portfolio 2 ways:
Investment type
This refers to what you’re invested in and where and means not putting all your eggs in 1 basket. Holding different investments (like stocks, bonds, mortgages, real estate , and cash – which can be found in mutual funds and segregated funds) is 1 way to diversify your portfolio. Investing in different industries, sectors, regions, and countries is another way to diversify your portfolio.
Asset allocation
Financial portfolios are traditionally divided into 3 main categories: equities (stocks), fixed income (which includes bonds), and cash. Equities can offer potentially greater returns and greater risk because stock markets can be unstable. Fixed-income investments offer less growth potential, but they’re generally more stable. This is especially the case with government or high-quality corporate bonds.
Cash or cash-like instruments, such as term deposits, offer limited but guaranteed growth. Cash also offers a safe way to park money if you're nearing retirement or for shorter-term goals, like saving to buy a house. Combining these asset types in your portfolio can help you increase your return potential, lower your risk and decrease your stress levels.