How Emotional Decisions Can Ruin Your Investment Strategy

Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

More money is left behind than lost during market declines. When an investor reacts emotionally to declines, they often pull money out of the market, derailing their investment strategy and leaving them much less exposed to equity markets. Often, these moves are made very near the bottom of the market and the investor leaves behind a substantial portion of return.

This year, the S&P 500 raised the hopes of many by climbing more than 7.5% by January 26 and then dashed them by falling more than 10% in the next 13 days. When the S&P 500 approached the 10% threshold, some investors became nervous and reduced risk by selling stocks and going to cash or bonds.

This is the point where they started leaving money behind. Rather than continuing to drop, the S&P 500 has risen 8.1% since then and may well rise higher. The challenge is once an investor derails their investment strategy and reduces their allocations to stocks, they don’t have a method for determining when to get back in.

This isn’t a new problem. I can remember investors in the fall of 2009 talking about how the market had “stabilized” and it was time to get back in. The S&P 500 had risen more than 56% from the market low. Markets had been anything but stable; yet, investors were trying to minimize the regret of abandoning a portfolio of diversified investments for cash and paying the price.

Rather than pulling money out of a portfolio of diversified investments, a better approach might be using asset allocation strategies designed to manage or reduce risk during significant market declines. These approaches reassure investors portfolios are being adjusted to reduce risk, while benefiting from a systematic risk-managing approach that ensures minimal return is left behind.

We see these strategies as potentially more beneficial to clients trying to balance an asset allocation in retirement. When a person can’t extend their career or increase retirement contributions, the ability to recover from downturns becomes a bigger challenge. In a low-income environment, using systematic approaches to risk management can manage the downside without relying on the still-paltry income provided by bonds.

Now seems like a good time to reassess risk. If you were able to hold on during the last decline but don’t want to experience something like that again, the recent rally has put you close to even. The regret of making a change now will likely be low. Most importantly, your portfolio will be better prepared for the next sharp downturn.

Investment Process

 

Share:
facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.
Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

RECENT POSTS

Use Your Budget to “Increase Your Paycheck”

I recently celebrated another birthday. I was disappointed when I remembered that, while my toys have gotten more expensive, they do not bring me even a fraction of the excitement a new set of Legos did when I was 6. But upon reflecting on some of the financial changes I’ve experience over …

Sushi and the Art of Stockpicking

Published by Rob Furlong Every year around the Oscars I remember that between two kids, a career and countless other commitments, I haven’t seen any movies since, well, the same time last year. This leads to a week of late-night binge watching, usually of movies that have lingered in my Net …

Understanding the Fiduciary Duties of a Trustee

If you have been named as Trustee or Successor Trustee of another’s Irrevocable Trust, you may be wondering what exactly the role entails. For Successor Trustees, your duties will not begin until the current Trustee is no longer able or willing to perform in that capacity.

The Future of Energy Stocks

Published by Jake Bleicher The price of oil has been cut in half since June when West Texas Intermediate (WTI) was selling at $107 per barrel. The excitement has provided ample fodder for industry analysts and media journalists to speculate about future prices. Some of the leading soothsaye …
1 2 3 83 84 85 86 87 88 89 90

Get in Touch

In just 15 minutes we can get to know your situation, then connect you with an advisor committed to helping you pursue true wealth.

Schedule a Consultation