The headlines:

  • Making decisions based on heat-of-the-moment emotions isn’t a good way to manage your investments, but even the most seasoned investors struggle to avoid emotional decisions
  • There are strategies you can use to make sure your emotions don’t get in the way of your investment performance, including understanding the data and focusing on what you can control

When was the last time you reacted to a situation based on your emotions?

You’re not alone, because there are very few people who haven’t sent an email in the heat of the moment, or decided that yes, replying to the comment on social media was going to be a good idea.

But typically, when we make decisions based on our emotions (especially negative emotions) they aren’t the ones we look back on fondly.

That’s true when it comes to investing, too.

Investing Is Emotional

When you put your money into the market, it can be scary no matter what your risk tolerance is, especially when you hear about significant market drops.

It can also be exciting when you hear about the market gaining ground and reaching new heights, but both of those emotions—fear and excitement—shouldn’t factor into your investing decisions.

Emotional Decision-Making Isn’t a Solid Investment Plan

You’re probably familiar with the phrase “buy low, sell high.”

It’s a great strategy in theory, but it’s also wildly misleading in its simplicity.

To buy low and sell high, you’d need to know when something was low, and then know to sell when it was high, and as you know, timing the market isn’t a great strategy.

What happens more often is that when we pay attention to the highs and the lows, we get scared when we hear news of the market falling. And as humans, we’re not great at basing our fears on logic and data.

Consider that more people are killed taking selfies than by sharks every year, but no one has (yet) made an entire horror-movie genre about selfies.

The same goes for investing and recessions.

According to a study by J.P. Morgan, the average past recession lasted 15 months. Meanwhile, the average past expansion—a period of growth in the market—lasted 47 months.

Rationally, that’s over three times as long as the average recession, but that doesn’t make most of us fear recessions any less.

If you’ve experienced a recession in the market or read about past recessions, it’s natural to feel fear of investing before or during another one.

However, keeping your money out of the market based on fear is going to be even more harmful to your portfolio over the long term, because you’ll miss out on the expansions, too. And the expansions are likely where you’ll find your investment returns.

The Common Investing Advice You Should Follow Instead

That’s why there’s another common investing phrase that can be much more useful than buying low and selling high:

Time in the market matters more than timing the market.

It’s based on precisely that data since over the long term, you (and your money) will participate in more growth the longer you’ve been in the market.

That’s why investing sooner rather than later—even in the face of fear—can be a good long-term money move.

But even once you’re invested, it can be tough to stay the course and resist the impulse to buy at market highs and sell at market lows.

You’re not alone when it comes to emotional decision-making, but with a bit of planning, you can protect your portfolio from impulse buying and selling.

How to Make Rational Investing Decisions

There’s sadly no magic pill that can take all of the emotions out of investing—even the most seasoned investors will admit they feel both fear and excitement during different phases of the market.

The issue isn’t feeling the emotions, but what you do about them.

Luckily, there are some key steps you can take to make sure you’re making rational decisions with your money, instead of reacting emotionally to market movements.

Read up on the data. There’s a wealth of historical data on market movements, and while past performance isn’t a guarantee of future results, there are some broad trends that can help you put current market moves into context. Here’s an excellent chart for you, that puts some high-profile recessions and market movements in context.

Focus on what you can control. You’ll never be able to control what the market does, but you can control your portfolio. If you’re looking for a way to manage risk, look into diversifying your portfolio across multiple asset classes, and make sure you understand how risk and return work in the context of your investments.

Work With Your Investing Fear, Not Because of It

One of the most common reasons people procrastinate investing is fear.

They’re afraid they’ll lose money in the market, and that might be something you’re feeling as you read this article. The bad news is that the fear isn’t likely to go away entirely.

The good news is there are plenty of ways you can manage it, since it’s a feeling almost every investor has at one point or another.

The best news is that you now know your emotions about investing don’t need to inform your strategies or decisions about investing—and what to do instead.


Investing 101: Let’s do this

Investing doesn’t have to be something scary and intimidating, and it’s one of the most powerful ways you can hit your goals and build wealth over the long term.

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