One of the greatest dangers to your wealth may not be the market’s dips and dives, it may be the temptation to make emotionally charged decisions regarding your wealth. As an investor, it’s important to remember what your biggest focus should be: your personal economy. Below we’re discussing the impact behavioral finance can have on your investments and what you can do about it.
What Is Behavioral Finance?
In a perfect world, the stock market would be predictable. Philosophers and economists have studied the markets for decades, even developing theories and models to explain and predict trends and responses in the market. The problem? Money, and the way we interact with it, isn’t black and white. As humans, we typically cannot make objective decisions regarding our own money. Whether we realize it or not, we are influenced by subconscious biases and what we read and hear on the news.
This behavioral bias can help account for unexplainable phenomenons in the market, such as the “January effect,” an increase in stock prices that tends to occur at the beginning of the year.
How Behavioral Finance Impacts Your Portfolio
Even the most disciplined investor could have a tough time staying strong during turbulent economic climates. With social media and 24-hour news cycles, no one is immune to hearing about breaking news or troubling trends.
When you hear on the news that the market has plummeted, your first instinct may be to get out immediately. This is a gut reaction, fueled by the short-term fear of a market crash. However, now’s the time to remember the truth about your investments: they’re meant to be a part of your long-term financial goals, not short-term gains.
When in Doubt, Call Your Advisor
To help avoid making impulsive, emotionally charged decisions about your money, talk to your trusted financial partner. Find reassurance in their calm demeanor and big-picture mentality. The market is meant to cycle, and using strategic, logistical planning is one way you can stay focused through these uncertain times.
It’s important to remember that your advisor is meant to act as the buffer between your emotions and your investments. With shifts in the market, together you may determine to reallocate certain assets. This decision, however, should be based on facts, logic and experience, something your advisor can help you with.
During times of economic uncertainty, remember to keep calm, stay rational and remain informed about your investments as well. We are here to help you stick to your long-term goals, so you should always feel free to reach out with your concerns and questions.
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