Emotions — especially fear — can impact your money decisions and ruin your investing plan.
Anytime there's a down day (or week or month or year) on the stock market, emotions might be running high. One emotion, fear, might make for serious problems with your long-term investing plan and can even lead to losses to your retirement portfolio.
It's important not to let your emotions rule your portfolio.
Don't Let Short-Term Volatility Mess Up Your Long-Term Investing Plan
A number of emotions can hold your portfolio back, resulting in losses to your portfolio.
Fear is probably the biggest emotion you have to worry about. Things are a little bit scary because there's a lot of uncertainty over what's next for the economy, as well as concern about whether or not the recent run in the stock market was too much, too fast. There's almost always an expectation that the next crash could be just around the corner.
Before letting fear take over, you need to step back.
It's bad enough if your conscious mind freaks out over the situation, but throwing your unconscious mind into the mix can worsen things. It can lead to panic, and it's rarely a good idea to make any decision — especially those related to your investing plan — while in a panic.
So, how do you keep from panicking?
Do You Have a Good Investing Plan?
First, it helps to be invested in the “right” things for you. You're more likely to avoid panic when you have a good investing plan and are confident in the long-term outcome. This is why paying attention to your retirement investing plan is especially important. You want to know that, over a period of decades, you are likely to come out ahead.
Invest with the following items in mind, and you will be less prone to panic when you see a dramatic drop in the stock market.
Risk tolerance
Worry about loss leads to panic. Understand your risk tolerance so that your portfolio is built in a way you can handle. When you have a portfolio appropriate to your risk tolerance, it will be easier to keep your cool and not let emotion rule your decisions.
Long-term realities
One of the most interesting things I learned from Oblivious Investing: Building Wealth by Ignoring the Noise by Mike Piper is that, over time, the stock market as a whole has yet to lose. So, if you can hold on to that reality, even amid short-term volatility, you can stop making panic decisions and instead evaluate investments on their value.
Index funds and index ETFs
I love index funds and ETFs because you can take advantage of the ability to diversify. Just about any asset class can be bought with the help of ETFs. Get into an all-market index fund or ETF and benefit from the entire market performance. And, during times like these, when things look somewhat bleak, you can take comfort in the above point and reinforce calm.
Long-term goals
Finally, create an investing plan with long-term goals in mind. What happens today or tomorrow isn't that important in the grand scheme. When you have long-term goals in mind, it's easier to avoid getting sucked into the fear spiral that often characterizes market performances like those seen recently.
Bottom Line
Don't change your investing plan without good reason. When you create a plan with the above points in mind, remember that it's a good plan to ward off the fear and other emotions that can result in abandoning the plan. If you abandon your investing plan due to panic, you could lock in losses and mess up your retirement.
