“Money, like emotions, is something you must control to keep your life on the right track."

-Ralph Waldo Emerson

“A wise person should have money in their head, but not in their heart."

-Jonathan Swift

“Money is better than poverty, if only for financial reasons."

-Woody Allen

A quick look at any of the top search results for “quotes about money” and you’ll find one thing to be true: when it comes to finances, people have strong emotions and opinions and not all of them coincide.

Volatility in the stock market is a welcomed and expected inevitability. Most investors do not begin with this understanding, but over time they learn that this inconsistency is common and their emotions often fluctuate during the ups and downs in the market.  How you react, and the decisions you make during these times can make all of the difference in your performance.

YOUR BEST RESOURCE AGAINST EMOTIONAL INVESTING

As one dives into what it takes to be a pragmatic risk taker the most common theme you will find throughout, is the “over time, experience and study” element.

Those of us who may just be starting out with budding investment portfolios, have likely not hit that moment where they ask, “Should I buy? Should I sell?” And for those who have seen their 401(k) lose 40% of its value as markets implode, it can be very difficult not to respond impulsively. As you see stock prices rise and decline, it can be a very emotional struggle to maintain a practical perspective and harness emotions.

How can one ensure that they have successfully shielded themselves against their emotions when making these long-term significant financial decisions? Here are just a few tips:

1. FIND A MENTOR

Investing even in the most conventional approaches like a 401(k), does not mean you should simply do what everyone else is doing. Far too many individuals find themselves following, what appears to be to most, valid direction. Although, if you ask even just 5-10 people in their later years of career and retirement investing, you will hear these common statements. “I wish I hadn’t done…” or “If I had only known…”

To start making the right investing decisions for you, ones that aren’t driven purely by emotion or the latest trend, your first step is to find someone you trust and ask them every question you can think of. Don’t be afraid to lay out your current investing approach and ask for feedback.

2. EDUCATE YOURSELF

When it comes to investing, the decisions made initially are often the most effectual. But even some decisions later in your life can have strong results—both positive and negative. No matter your career point or approach to retirement investing, now is the right time to strive for better cognizance of your current portfolio status, as well as new opportunities and approaches.

Here are just a few resources we would recommend to get you started:

Online resources –

  • Brightscope: This website is very helpful if you are looking for a quick way to evaluate your personal 401(k) plan, check out a financial advisor you are considering, or read something on nearly any financial and wealth management topic. Data drives better decision-making for individual investors, corporate plan sponsors, asset managers, broker-dealers, and financial advisors. To get a feel for the website, check out their home page or click here to see my profile and latest articles.
  • CFA Institute: The Institute for Certified Financial Advisors has two great blogs worth following. The first is called, “Enterprising Investor” and the the other is called “Market Integrity Insights.”
  • MorningStar: This website is primarily a news and updates site for everything investment and personal finance. It also comes with a number of useful tools and resources to help you dive further into detail about any topic.

Books –

Even if you don’t agree with everything written on any of these recommended resources, you will realize you have come away with a thorough perspective on the matter of investing. It’s that comprehensive perspective that will shield you against emotional investment decisions now and in the future.

3. PROACT NOT REACT

The biggest pitfall any investor is at risk of is reacting too quickly and without the sufficient data behind their decision. The CFA Institute recommends at a minimum, striving to answer each of the following questions right away before you are faced with a life event or market fluctuation:

  • Do you want to involve your spouse in planning your finances?
  • When the market fluctuates (even dramatically) what is your process for making decisions?
  • What do you want to have happen with your assets after you die?

Questions and events like these, are reasons why many choose to enlist a financial adviser who can help construct a plan that works for them personally.

Beyond bringing on a financial advisor to help with frequent evaluation and proactive decision, making a common, highly valid approach to making adjustments with your investments is vital to maintaining a consistent schedule for evaluation and a “rebalancing” of your investments. Simply by having that schedule in place you will be more comfortable as the market waters become a bit choppier.

4. DISTANCE YOURSELF

Research concludes that self-driven investors usually buy and sell in accordance with their emotions, often leading to adverse results.  Don Phillips, Managing Director at Morningstar, believes these investors reduce their potential returns by 1 to 2 percent per year, as a consequence of buying when prices are high and getting out when prices are low.  This might sound illogical, but this is a natural result of investing emotionally.

Consider this information from DailyFinance: since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year’s highest close and lowest close is 23%. This illustrates that the market does fluctuate, sometimes quite dramatically. Remember this the next time anyone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer comes after spring.

With all this being said, what is the single most beneficial way we can protect our investments against an emotional response to market fluctuation?

Distance yourself, even if just a little.

Using the services of a wealth manager can be one of the best decisions to make towards guarding against emotional responses.  Allowing that one-degree separation will help ensure that when emotional tendencies kick in, a professional will be there to help us back away from the ledge.

For more wealth management advice like this feel free to get in touch with me and our team by visiting our website at truenorthwealth.com.Martin A. Watkins, CEO, TrueNorth Wealth

In 1993, Watkins co-founded Utah Medical Association Financial Services and served as the Chief Operating Officer and adviser. Watkins grew the practice from inception, to advising over 400 clients representing $625 million under advisement and $300 million under management. In September 2006, Watkins founded TrueNorth Wealth as a private practice headquartered in Salt Lake City, Utah for individual clients. In 2007, he assisted the Idaho Medical Association in establishing a financial services unit. He has held the CFP® designation since 1997. He helped develop the Utah 529 Education Savings Plan (“UESP”) investment options and currently maintains an advisory role with UESP.