Our emotions can be a huge obstacle to our investment success. Emotional investing decisions, such as chasing performance or moving into and out of the market, are usually reactions intended to avoid risk. However, they could lead to the biggest risk of all: not reaching your long-term financial goals.
Remember, a short-term market decline doesn’t change your long-term goals. It’s important to maintain a long-term perspective and stay invested during the ups and downs.
When the media hype the latest “hot” investment or highlight “dramatic” declines in the market, investors are often tempted to chase the winners and sell the losers. But this emotional response can lead to buying investments at market peaks and selling them at the bottoms – a recipe for underperformance.
Instead of trying to find the next hot investment and chasing performance, it’s important to have a broad asset allocation, rebalance regularly and remain diversified. This helps ensure you have different types of assets and investments, each of which may perform differently at different times. While diversification cannot guarantee a profit or protect against loss during declining markets, it can help smooth out market ups and downs, potentially providing a better long-term experience.