3 tips for avoiding emotion-based investing
Select’s editorial team works independently to review financial products and write articles that our readers will find useful. We may receive a commission when you click on product links from our affiliate partners.
When it comes to investing, there is only one thing we can be sure of: no one can predict what will happen in the market.
Despite the myriad investment concepts, books and data that exist, at the end of the day we are not good at predicting when the market will go up and down. Investment gurus talk about risk and return, but expert Patrick Geddes argues that there are two conflicting emotions that end up driving our investing behavior: fear (measured by risk) and greed ( measured by yield).
âKnowing more about how your brain is wired and how your emotions determine your investment can actually be even more important than analysis,â he explains.
Sometimes these emotions take over us. Geddes calls this concept of emotionally-based investment decision making the âillusion of controlâ.
âAs investors, we imagine a kind of control over the results that does not correspond to the unfortunate reality that stocks behave quite randomly,â says Geddes, co-founder of investment management company Aperio Group, former Morningstar Research Director and author. from the next book, “Transparent Investing”.
To protect yourself against your worst instincts, check out three tips from Geddes:
Tip 1: Prepare in advance for market meltdowns
Falling markets only trigger one thought in investors’ minds: the value their investments suddenly lose. While it is human nature to want to react quickly to market declines, resist impulsive changes in your portfolio out of fear and panic.
âWe all feel bad when the markets explode like they did during the technological collapse of 2000-2002 or the financial crisis of 2008-2009,â Geddes said. “The best advice for such times is to stay the course.”
The market may as well go up as fast as it can fall. Keeping your money invested throughout fluctuations is what helps your money grow over time.
Rest assured, volatility is part of the price you pay to get your money to market – and it will happen again. The best thing you can do as an investor when the market is crashing is usually to do nothing. âYou just have to weather the storm, terrifying as things may seem,â Geddes adds.
Tip 2: for stocks, choose index funds
As a young investor, you may be eager to find the next hot stock. After all, the stories of how people turned $ 1,000 into millions are compelling, Geddes notes. But the odds are high against anyone who tries to outsmart the market, even financial professionals.
âEmotionally, you might want to brag if you’re particularly lucky. But your actual total wealth will be higher by taking the boring route of broadly diversified index funds and recognizing that on average, the ability to pick which stocks to outperform is just another illusion, âhe explains.
You might be surprised to learn that you are likely to get much better results with this boring and counter-intuitive approach to passive investing through index funds. By using your brokerage account to buy mutual funds and diversified index funds, you take less risk than when you buy stocks in a sole proprietorship, and you can sit back while your portfolio grows for the long term. .
The best free stock trading platforms
Select has reviewed over 12 online brokers that offer commission-free transactions and narrowed down the top six platforms for all kinds of investors:
E * TRADE
These six offer the widest range of investment options, user-friendly technology, quality customer support, and educational resources. (Learn more about our methodology for selecting the best $ 0 commission trading platforms.)
Tip 3: Check your wallet no more than once a year
You probably heard it first from Warren Buffet: Invest for the long term. Checking your portfolio no more than once a year will avoid any temptation to update your investments as the market moves.
To best weather the ups and downs of the market, Geddes agrees that you should leave your investments alone for the long term, following the math rather than the excitement of the stock market.
âThe more obsessed you are with the daily news cycle, the more tempted you will be to go out there and do something, succumbing to the illusion of control again,â says Geddes.
At the end of the line
Investing doesn’t have to be complicated, and Geddes’ three tips above demonstrate it. Know that market declines are going to occur and that the best reaction is not to react. Your money is more secure when you invest in diversified index funds held for the long term. And it’s good to go months without checking your wallet progress.
The point isn’t to separate you from your emotions, says Geddes, but rather to understand how they play a role in your investment decisions.
âWe can lead healthier lives – with healthier wallets – the more we develop good habits, which are much easier to describe than to implement,â says Geddes. “But at least that’s the part where we really have control.”
To determine which $ 0 trading platform offers the best services to consumers, Select narrowed down the offers to a list of 10 initial platforms. We then analyzed and compared each based on the following factors:
- Minimum Account
- Account types
- Account and advisory fees
- Customer service
- Available investment expenditure ratios
- Selection of investments
- Trading fees
- Technology available, including mobile platforms
- Educational tools and resources
After reviewing the above features, we have based our recommendations on platforms offering the widest range of investment options, robust educational tools and resources, user-friendly technology, and fees and ratios. lowest spending. We also looked at each company’s customer support structure, available lines of communication, and application reviews.
Note that with all trading platforms there is no guarantee that you will get a certain rate of return or that current investment options will always be available. To determine the best approach for your specific investment goals, it is recommended that you speak with a reputable fiduciary investment advisor.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.