It’s only natural to be concerned when the market drops. But expecting volatility and having a sound financial strategy in place may be the best defense when events roil the markets. In spite of our good intentions, some common behavioral tendencies can stand in the way of making sound investment decisions, especially when the markets are volatile.
Behavioral scientists have identified cognitive biases that may cause us to ignore fundamental and critical factors and possibly focus on other information that may not be as important. Clearly, normal emotions can drive hasty decisions that could harm the long-term performance of your portfolio.
Here are just a few examples of behavior you might want to understand and avoid:
Confirmation Bias: People have a natural tendency to come to a conclusion and then gather data to validate that decision, rather than first evaluating data before coming to a conclusion. One way to overcome confirmation bias is to seek outside counsel from someone who can provide a different and unbiased perspective.
Chasing Performance: Some investors may be tempted to move a lot of money into asset classes or individual investments that have had the highest recent returns. The problem with this approach is that past performance doesn’t guarantee future results, and today’s “hot pick” could turn into a loser when conditions shift.
Reacting to Media: By the time the average investor learns about economic developments or other events that could affect individual investments and the financial markets, it is usually too late to respond effectively. In fact, it’s very likely that the news is already reflected in the prices of securities. And following the pack may not be the wisest choice — in fact, following someone else’s lead instead of using your own judgment could land you in trouble.
Loss Aversion & Panic Selling: When investors pull out of investments or the market because they are afraid of losing money, as opposed to evaluating company fundamentals, they often end up selling at the worst possible time and buying again at higher prices after.
One of the best strategies for staying calm during market swings is to confide in a trusted Financial Advisor. The LPL Financial Advisors at Elements Wealth Management provide education and help you balance your goals with market conditions. Our LPL Financial Advisors have more than 125 years of combined experience and provide an objective viewpoint as you weigh investment opportunities and pursue your long-term objectives.
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Learn more about surviving marketing swings from a previously live broadcast of Elements Live. Click here to watch the seminar.