Why You Shouldn’t Let Emotions Take Over When Investing
While some investments carry little risk, when it comes to the stock market there is always an element of unpredictability. No one knows exactly what the future holds, despite what they may tell you. There are certainly indicators that help us plan for a changing market place, but sometimes we are caught off guard. When that happens, investors in the stock market will see volatility. This is normal, and you need to be prepared for it if you are going to buy and sell stocks.
The good news is that there often is an opportunity when prices fall. The key is to keep your emotions in check and stick with logic. It might be scary to throw down more cash when all the news out there seems negative. The media loves a good story, so they will latch on to the fear in investors and carry it over for weeks to keep you watching their network. Don’t let the fear paralyze you. This is may be the time you need to take action!
It is crucial to have cash reserves when you are investing in stocks. When the market tanks and you have cash available, that means you have money on hand to buy more when the prices are low. It may seem counterintuitive to start investing more money when all the news out there is bad. However, some of the most successful investments take place when everyone else is running scared and you are holding your ground. Ideally, the fear will subside and other investors will want back in. Luckily for you, you are already on board. So, when the market makes a rebound you are along for the ride instead of trying to jump onto a speeding train.
Likewise, you need to know when enough is enough. You may be thrilled to see a particular stock has risen in a short time and want to keep holding onto it so you may see the same returns in the future. Keep in mind that just because a stock’s price has increased, doesn’t mean it will continue to do so. Stock prices vary for a number of reasons. Sometimes, it’s as simple as excitement over an upcoming release of a new product. Think about how Apple releases a new iPhone what feels like every two weeks. As soon as your iPhone 7 is delivered to your doorstep, the iPhone 8 is making headlines. Apple and their iPhone are trending on Facebook and Twitter and everyone’s going wild for the next big thing. This can drive prices up even though nothing has actually changed yet within the company. The expectation of high earnings because of all this hype may actually cause the stock to be overpriced (not a good time to buy). If those expectations aren’t met, the stock price will likely fall. Don’t let big gains make you cocky; you still need to understand how the stock should be priced versus how it is actually priced. If it turns out that the stock is more expensive than it should be, it may be time to sell.
Many times, this is where an advisor can be a huge asset. They are professionals managing money for a living. They shouldn’t panic when the stock market drops, or get over excited when a stock price rises. Their job is to look at the whole picture objectively and direct you appropriately. It is often easier for someone else to see the situation clearly, than it is for you, the investor. Obviously, no advisor wants to see account values decline, but it is their job to tell you when to stick it out and when enough is enough.
Keeping your emotions out of investing may improve your likelihood of yielding better results.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.