Investor emotions can play a major part in the success or failure of an investment portfolio, as well as the overall wealth plan. For most of us, money is bound up with powerful emotions, such as security, confidence and even fear. But the emotions of investing can cause you to lose focus on important areas of your financial life, most of which have absolutely nothing to do with the stock market.
We know that remaining patient and disciplined can be extremely difficult, especially when stocks or other assets are soaring or plummeting. The way our brains are wired can cause us to make emotional decisions about our money at precisely the wrong moments.
As the Cycle of Market Emotions chart above illustrates, many investors tend to “buy high” and “sell low.” Markets are sometimes prone to sharp and erratic movements, which can precipitate panic and cause investors to sell at inopportune times. Conversely, during a strong bull market, investors often rush into the market because they feel “elated” and buy at the peak.
Ultimately, this kind of emotional, short-term behavior can have detrimental consequences, including dramatic portfolio underperformance.
Moving in and out of markets and asset classes can result in investors missing those relatively small number of days when markets soar unexpectedly. Therefore, it’s vital that you stick to your plan — especially during periods when the financial markets are behaving in extreme ways.