Emotions: An investor’s worst enemy

An investor’s emotions can greatly influence how they act and perform in the market. Understanding and managing these emotions is the key to success. So, let’s take a look at the importance of keeping a cool head, even when the markets don’t seem to be going your way.

The market cycle and the emotional cycle

No matter how well off they are or how much money is at stake, all investors need to be wary of their emotions and behaviours. Generally, market cycles evoke similar emotional cycles in investors, which may affect their decisions. Market fluctuations can cause excitement, enthusiasm or excessive confidence, not to mention regret, stress—and in extreme cases—panic or despair.

These emotions can inspire impulsive choices, such as investing in hedge funds when the markets are bullish, or, during bear markets, selling certain securities too quickly and locking in a loss that can never be recovered.

You should also be aware of your cognitive biases, which tend to impede rational thinking. We all have our own investment style, depending on our personality. But regardless of our level of confidence or knowledge, it’s important to approach the world of investing with humility, objectivity and rigour.

Investing long term to mitigate financial losses

Investing for the long term is an excellent way to keep calm in the face of stock market fluctuations. Even if short-term investing can bear fruit thanks to favourable volatility (when markets are on the rise), the higher potential for favourable returns in the long term is irrefutable.

In fact, if you look at historical data over 5, 10 or 20 years, you’ll see that market returns vary little and almost always positively. Having an investment strategy limits the impact of market volatility and greatly reduces the risk of losing money.

Remain calm no matter what

That said, even long-term investing is made up of a series of smaller, short-term episodes, which is where avoidable pitfalls usually lurk. We live in a world where the fear of missing out (also known as FOMO) can make us want to take part in everything, especially when the markets skyrocket.

The temptation to suddenly change direction and revise certain investments to suit the moment can be strong. However, these spikes follow cyclical patterns and often subside quickly. That’s why, even if it seems counter-intuitive, it’s generally more profitable to do nothing and stick to the goals you’ve set, without losing your head (and your money).

Determining your risk tolerance… and asking for advice

To sail smoothly through the sometimes stormy seas of investing, it’s important to align your strategy with your risk tolerance. You can determine yours by creating a detailed investor profile with the help of a financial security advisor. Knowing your tolerance level will help you avoid getting sucked in by your emotions and making impulsive decisions.

The truth is, even seasoned investors seek an advisor’s fresh set of eyes. The expertise and objectivity of a financial security advisor will help you keep a level head and make informed decisions.

In fact, those who team up with a financial security advisor are shown to have higher returns than people who invest on their own, even accounting for the management fees. In addition to the support, expertise and peace of mind of having a professional on your side, you’ll be even richer for it!

In short, by investing for the long term and with a full understanding of the emotional influences to which you may be subject, you can help mitigate the risks associated with market fluctuations. Remaining disciplined and following the advice of your financial security advisor is the best way to make the informed investment decisions that will lead you to a solid financial future.

When it comes to investing, stay cool and keep a lid on your worst enemy—your emotions!

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