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Avoiding Emotional Investing Mistakes

Stack of wooden building blocks

Too often our emotions can be the biggest risk to our investment success. In these situations, it’s important to take a “timeout” and remember why you’re investing – your retirement, your child’s education, your legacy. A short-term market decline doesn’t change these long-term goals. A timeout can help you review your goals and objectives, recognize behaviors that could cause trouble and avoid making emotional investment decisions.

The result of our investing behavior

Why is it so important to be on your best “investing” behavior? Poor investing behavior can lead to poor diversification, chasing performance, and moving into and out of the markets (often at the wrong time). The typical result of these behaviors is poor long-term performance, which could lead to the biggest risk of all: not reaching your long-term financial goals.

For example, the average annual return for a balanced portfolio (65% equity and 35% fixed income) over the past 20 years was 6.7%. However, the average U.S. investor received a 3.3% return due to his or her investing behavior. But with the power of compounding, the difference wasn’t simply 3.3% per year; it could have been $180,000 over that 20-year time frame if they earned these returns each year.

How Investing Behavior Could Lead to Poor Performance

Investing behavior chart

Source: DALBAR, QAIB 2017; Edward Jones estimates. Hypothetical illustration using QAIB average equity return of 7.68% for the benchmark and 4.79% for the average investor and average fixed-income return of 4.96% for the benchmark and 0.48% for the average investor. Annualized return for the past 20 years ending 12/31/2016. Assumes initial investment of $65,000 in equity and $35,000 in fixed income, rebalanced annually. The Equity benchmark is represented by the S&P 500. The Fixed Income benchmark is represented by the Barclays Aggregate Bond Index. Returns do not subtract commissions or fees. This study was conducted by an independent third party, DALBAR, Inc., a research firm specializing in financial services. DALBAR is not associated with Edward Jones. Past performance is not a guarantee of future results. Rounded to nearest $5,000.

When you feel your emotions beginning to get the better of you, take a timeout and work with your financial advisor to review your goals before making what could be an emotional investing decision. Your portfolio, and your future self, will thank you.

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