If you went through a series of emotional lows and highs during 2009, you’re not alone.
It’s human nature for emotions to overrule logic when it comes to investing. Academics have established a field of study around this phenomenon, called behavioral finance.
For example, when you touch your hand to a hot stove, instinct and fear tell you to move your hand away. Yet when it comes to stocks, this same reaction could have negative effects on your long-term strategy. In other words, buying low and selling high are contrary to how our emotions are wired.
To be a successful investor in the stock market, you have to know yourself; you have to know where your security comes from. When you’re checking your account several times a day, or even several times a week, it raises the question, “Where do you place your trust? Where is your security?”
The bottom line: don’t let the stock market become your religion. It’s easy to get consumed by the constant churning of financial data. Risk is forever present and markets zigzag up and down – sometimes dramatically, as we saw in 2008 and 2009.
So how does one stay sane?
There are steps you can take to insulate your emotional response and help you make smart choices with your money.
Drastic measures might include unplugging from the 24-hour news and stock channels and removing the stock quote page from your “favorites” bar and smart phone.
Instead, consider working with a competent financial professional you trust to design a plan. A written plan serves as a guiding document to bring harmony to all your financial decisions, and includes an investment policy statement representing your personal investing constitution.
With these documents in place, you’ll have the freedom to focus your energy on what’s truly important to you in life, whether it be time with family, improving your career, serving the community, or just getting out and experiencing the things you enjoy most.
After taking drastic measures to insulate yourself from the market, if you still have trouble resisting the lure, then you have to ask yourself, “Is the stock market really the right place for me?”
What good is fighting to “beat the market” if the ensuing anxiety affects your physical health? Because the truth is, anxiety is never absent for the investor.
When the market turns around, a new fear will emerge to replace the old, substituting the fear of loss with a fear of “missing out.” Wall Street has another word for this: greed.
Instead of wasting time fleeing losses and chasing returns, better to stick to a well-diversified, long-term strategy that is subject to accountability and review by a professional. In the end, there are more important things in life.