In this video, we discuss why making emotional investment decisions is a big mistake.
In general, some people see the stock market as an extension of human emotion. That’s why when we see ups and downs in the market, it triggers emotions that drive investors to either buy or sell their investments at the wrong time. Essentially, we’re biologically wired to gravitate toward things that make us feel good and run away from things that make us feel bad.
Fear and greed are often to root causes of our emotional financial decisions. Our fear causes us to abandon an investment strategy when it’s doing poorly. Fear also causes us to be too cautious with our investments. Greed, on the other hand, causes us to chase investment fads and take on too much risk.
For example, the 2008 Financial Crisis crushed millions of investors’ portfolios. And what happened? Many investors panicked and sold near the bottom. Their fear kicked in. Since then, the markets have rallied and investors are still afraid to buy back in – they’re keeping their money on the sidelines.
Why is it important to stay invested?
There is a massive difference in returns for investors that held on to their investments for 1, 5, 20 years because the power of compounding can dramatically impact your returns. Additionally, the gain required to fully recover from a loss is more than you would think. In 2008, we saw an intra-year decline of around 50+%, which means that we would need a 100+% gain just to get back to even.
The bottom line is that when markets swing it’s important to stay invested in order to capture the return of a market rally. Whether it’s fear or greed, do your best to leave your emotion at the door – your likely retirement depends on it.