We all know the saying; Buy low, sell high, simple right? Yet, why do so many investors do just the opposite and buy high, sell low? One word: emotions.
Although we would all love to picture ourselves as the cool, calm, confident investor with nerves of steel when the going gets tough, in reality, the vast majority of us are not. When the market becomes volatile and we see numbers going down, we turn into a bundle of nerves and panic. We have a natural urge to sell, gather up what assets we have left and take shelter. It’s human nature. Then later, as the market turns again, realization settles in; Uh oh, I bought high and sold low, not what I planned to do.
Intellectually most investors know they should probably weather the storm, and resist bailing out at a market low. However, most people struggle to hang in there when it comes right down to it. It happens over and over again. This is a popular topic in the financial business. In fact, it is a complex topic studied by specialists in behavioural finance who analyze investor behaviour.
So how do you accomplish being that cool, calm, confident investor you would like to be? Get started by working in partnership with your financial advisor to:
- Make sure you understand your own tolerance
- Make sure your investments match your risk tolerance and long term goals
- Understand that volatility is the very nature of the market
- Understand that you can use volatility to your advantage
- Invest in high quality well managed investments rather than something risky if not suitable
- Choose a financial advisor who you trust to look out for your best interests and be the voice of reason when you need it most
The link below is a good two minute video on how emotions affect long term investment success.
Understanding the emotions of investing and using the tips above can help you become the confident investor we know you can be.