Do market drops make you want to “do something?” Something like sell EVERYTHING and move your money to a CD or sell the one stock or mutual that is down and put that money in something that’s performing better? Sure, we all talk about keeping our emotions in check when it comes to investing but I wonder how many people actually follow that advice.
Today’s Getting Going column by Jonathan Clements is about how to stop your emotions from wrecking your returns (free). The article closes by offering a few strategies for keeping your emotions under control when things aren’t going so well in the market:
- If the market pluncges and you have an overwhelming urget to act, do something sensible. – Clements recommends sending a $100 check to your favorite mutual fund or rebalance your portfolio back to your target mix. I think this is solid advice. The main thing is to NOT make a rash decision!
- If you are tempted to make big portfolio changes, get a second opinion. – Or, start a blog and write about your feelings. Or even better, send me an email, which I’ll post and AFM readers will offer you some support.
- Automate your investing, so you keep buying stocks during rough markets. – I can’t tell you enough how important this point is. If you don’t put your investment plan on automatic, you’ll find yourself putting off mailing that check to your investment account until things settle down.
- Try the “restart” strategy suggested by Prof. Loewenstein (mentioned earlier in Jonathan’s article) – From the article:
Take your existing savings and set them aside in a diversified portfolio, such as a target-date retirement fund. Thereafter, focus your energies on building a new portfolio.
Your monthly savings will have a huge impact on this new account’s growth, so you will have a strong incentive to save. Your savings will likely also overwhelm any hit from a market decline. What if you make some foolish trades? Because you’re dealing with only a small portion of your wealth, you won’t do too much damage.
I’m not so sure I like the last strategy. It seems like you’re giving in to your emotions. It’s also more work!
That said, it is very important to keep your emotions under control. Your future depends on it.