The Markets and Your Emotions
It is very difficult to time the markets but many of us end up trying to doing so based on our emotions.
Research shows evidence on how irrational the average investor is and how much damage emotions do to long term portfolio performance.
You may currently be out of the markets, but should you stay out of the markets?
We know that, “investing in the market” can be rewarding, provided we stick to our plan and apply rational thinking to both the short and long-term.
The cycle of market emotions
The cycle of market emotions illustrates the investment cycles the average investor goes through.
Strategies to help you keep your cool
A well diversified portfolio includes
- Asset Class
Diversification allows your portfolio to add value over the short and long-term. Some investments will appreciate and some will depreciate in value, but your portfolio as a whole, properly diversified, will grow over time to meet your investment objectives.
In times of volatility, the key to investment success is maintaining a long-term horizon and diversification. Diversifying investments across asset classes, market caps, and style can continuously open doors to opportunities when economic conditions change and the market shifts.
Dollar Cost Averaging
How can an investor tame volatility, turning it to his/her advantage? A time-tested method is dollar cost averaging. It lets an investor take advantage in dips in stock prices - buying low as well as buying high.
The net result is that dollar cost averaging allows an investor to reap gains from volatility while an investor who puts a lump sum to work has to endure volatility perhaps with no gain in the short-run.
The key message I would like you to take away is …LONG-TERM INVESTING. Don’t let emotions dictate your investment choices!