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Listen to your gut? Not when it comes to investing!

People are emotional beings. We experience fear, anxiety, confidence and elation – it’s all part of what it means to be human. But when it comes to investing, our emotions can lead us astray.


You might listen to the news over breakfast and hear yet another economic reporter talking about how markets have dropped (or spiked) overnight - what can feel like a rollercoaster ride is called 'market volatility'. 

With volatility comes the emotional aspect, where it’s easy to get excited about riding the wave of a market upswing, but also worrying when markets drop. 

Decisions on what to do with your money should be made based on rational information - using our heads, not our hearts. The trouble is, too many Australians let their emotions take over.

One in two people let emotions drive their investment decisions

Would you sell your investments because you’re scared that the market has dropped? Would you buy because you’re worried that’ll you’ll miss out or even excited that the market has spiked again? 

A global survey of investors found 55% of Australians say their emotions are either the major or only influence when it comes to making investment decisions. A further 34% say emotions have a ‘medium’ level of influence on their investment choices. 

Only one in ten (11%) of us keep our emotions separate from investing.

The dangers of emotional investing

Allowing investment decisions to be guided by emotions brings a whole new set of risks.

One study found that if we set goals when we’re feeling down, it’s more likely that we’ll set very low targets. Conversely, investing when we’re feeling upbeat can lead to rash decisions.

Emotions can play a part in what you do with your investments, where it might mean you sell out of something at a low or buy at a high. This could mean making investment choices that aren’t necessarily guided by a strategy, but your heart.

Invest with mind not your mood

There are a number of strategies you can adopt to help you isolate your emotions from your investments.

1. Diversify

Growing and maintaining a diversified portfolio spread across different asset classes always makes sense. It gives your wealth resilience against downturns in any one asset class, and lets you harness the power of different markets and/or industries.

2. Commit to dollar cost averaging

Dollar cost averaging simply means investing set amounts at predetermined intervals. For instance, you may decide to invest $1,000 every quarter, or $5,000 annually. 

The amount and interval is not the key issue. What matters is that you stick to the process, because this is a hassle-free way to ensure you buy more when asset prices are low, and buy less when asset values are high – regardless of how you’re feeling on any particular day. The beauty of dollar cost averaging is that it evens out the price you pay for your investments to more of an average figure over time, so you can avoid paying too much for a particular investment.

3. Know your risk triggers

Certain events can trigger strong emotions. A tough week at work or issues at home can test our resolve. Understanding what triggers your emotional responses makes it easier to identify times when it’s not ideal to make investment decisions. 

4. Understand past mistakes

It’s not always easy to look back on past errors, but it is essential to understand what went wrong if you’ve made some investment calls in the past that you’ve regretted at a later date. If you consider the circumstances, it’s possible your actions were emotionally driven.

5. Fix your gaze on the horizon

Successful investors take a long term view – after all, it’s all about building wealth for the future.

There are some types of investments that might make it easier to set and forget, and a good financial adviser can help you work out if they might be right for you.

6. Get expert advice

When emotions are running high, the voice of reason can often come from someone who has a bit of distance from the situation. 

That’s when an expert can help you stay focused on your long term goals and the game plan to get you there. Your local Mortgage Choice Financial Adviser becomes a true mentor throughout your investing journey.

If you want to get expert advice on your investment journey, call us today to arrange a meeting.

Posted in: Financial planning

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