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How to Take Emotions Out of Investing

Dr. Dan Pallesen, CFP®

Director of Financial Education

Last Updated
May 31, 2022
Man looking out into peaceful future

3 Tips to Help Emotion-Proof Your Portfolio

One of the most valuable benefits of working with the Creative Planning team is that we understand your investments represent more than just the returns they provide. They’re a means to fund your dreams. A few percentage points’ difference in your investment performance can mean the difference between achieving or letting go of a specific goal, so of course there’s emotion involved.

However, it’s important to avoid making emotionally motivated investment decisions, as these moves often result in the unintended consequence of selling low and buying high, which can drastically reduce your long-term returns. The following tips can help you take the emotion out of investment decisions.

Tip #1 – Have a plan in place.

Yes, it’s this tip again. You’ve heard us say it before, and you’ll hear us say it again in the future. The number one way to avoid making emotionally driven investment decisions is by following your long-term investment plan.

Your wealth manager will first work with you to determine what your investments need to accomplish. Then he or she will create a detailed plan to guide your buying and selling decisions. While it’s impossible to predict the market’s short-term direction, we can count on the fact that there will be periods of volatility. While your wealth manager may recommend small tweaks to take advantage of certain market conditions, your investment plan will guide your long-term strategy and help you weather short-term fluctuations in pursuit of your goals. Emotions around money often limit our focus to the present moment. Referencing the financial plan helps us zoom back out and alleviate any short-term anxiety.

Tip #2 – View volatility as opportunity.

Another benefit of sticking to your long-term investment plan is that it allows you to take advantage of opportunities during periods of volatility. For example, a market drop may allow you to purchase a stock that traded at $50 a short time ago for $25. This lowers your cost per share and can help improve your portfolio’s overall return when the market rebounds again.

One great way to take advantage of lower prices without being driven by emotion is through dollar-cost averaging. This is the process of investing an equal amount at regular intervals. By continuing to invest regardless of an asset’s current share price, you’re able to purchase more shares when prices decrease and fewer shares when prices are high.

Tip #3 – Rebalance regularly.

Rebalancing is the process of realigning a portfolio’s blend of assets back to a target allocation when it drifts out of balance due to market movements.

For example, let’s say you own stocks and bonds. When stock prices drop, your portfolio will own a smaller percentage of stocks compared to bonds. Using an opportunistic rebalancing strategy, we would sell a portion of your bond allocation to purchase stocks, which boosts your stock percentage back to your desired target. The opposite would occur during a market upturn; your portfolio would end up with a larger percentage of stock, so rebalancing would lead us to sell stocks and buy bonds within the portfolio.

Periodically rebalancing your portfolio in this way is a strategy designed to help you sell high and buy low, without the risk error that often occurs with short-term, tactical moves.

At Creative Planning, our experienced teams help clients remain focused on their long-term goals through periods of market volatility. If you’d like help developing your investment strategy, or with any other financial matter, schedule a call with a member of our team.

 

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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