Is it normal to get emotional over investing?

It is important to understand some basic facts about the stock market in order to understand why emotions become such an important part of investing. We know that, over time, the stock market will go up. Unfortunately, this doesn’t happen as smoothly as we would like. The continual volatility of the market, the ups and downs, can have a significant impact on our emotions, causing us to make poor investment decisions. In the long run, stable investment strategies will always outperform emotional reactions.

Video Transcript

When we think about the stock market, we often picture a slick trader buying and selling stocks at the right time to make a fortune — taking big risks, gambling, getting so-called deals and cashing in at the so-called right time. This is not the way to invest. In fact, there is a smarter and more effective way.

What is the best way to invest?

The best way to invest is by choosing a stable investment plan and sticking to it. In order for your investments to be effective, you must be willing to stick to your plan no matter what happens. The news, social media, friends and relatives will all say things that can affect your emotions as an investor.

The world is constantly changing and the stock market is constantly moving up and down. Investing bandwagons and investments claiming to get you rich fast will always pop up. And, unfortunately it is guaranteed that in the short term, the market at some point will go down. If you are investing for the long term, this should not concern you. Based on the past, it is also guaranteed that in the future the market will rise. This is the Dow Jones Index over the past 100 years. As you can see, there are times when it goes down, but overall, it eventually goes up.

Suppose you were emotional and, during one of these dips, you took all of your money out of your investments. A couple of years later, when you regain confidence in the market, you decide you want to put your money back into the market. You will have lost any upside you could’ve gained by simply staying invested. Also, you could have saved money by avoiding the transaction cost of buying and selling.

The importance of having a plan

The best way to avoid emotional investing is to have a plan. Create an investment plan that is not dependent on short-term fluctuations. It is good to create a plan in which you are contributing regularly — despite the current market conditions. You can work with a financial advisor to assess your investing timeline, goals and the level of risk you are comfortable with to choose a plan that is right for you. Once you have the plan, the rest is easy. Just ignore the noise and stick to the plan.