One of the most common causes of people not achieving their financial goals is because we allow our emotions to guide our investment decisions. The biggest of these emotions are fear and greed.
Fear is probably the most potent emotion an investor would feel right now, with markets worldwide down over 10% in the last 3 months. When we go through times like now, there can be a strong urge to cut our losses and disinvest, moving our funds into something safer like cash. This means we are selling stocks when they are priced at a low point. we then sit disinvested while the market recovers and our loss is cemented. (money heaven)
Greed happens when the market, a share or a sector is shooting the lights out with abnormally high returns, and we buy in when their price is high. We do this because we don’t want to miss out and think this trend will continue indefinitely.
Unfortunately, the investment industry takes advantage of times like this. Instead of publishing articles on controlling your emotions, they launch products or funds that play to whatever emotion makes you uncomfortable. Then, when markets are down, you will see guaranteed products or funds appear.
A study has shown that the guarantees offered by these products outperform the indexes they track in less than 5% of cases, meaning that staying invested would have left you better off in the long term 95% of the time. These products carry hidden fees and offer advisers big upfront commissions, which are seldom revealed to the investor.
The way to control these dangerous emotions is to understand what investment strategy you need to achieve long-term success based on your unique personal situation. This can only be done if you have a proper long-term financial plan which considers who you are, what are wanting to achieve and over what period.
Emotions are real. We cannot escape them. However, if we understand this, we can try to control them.
Dirk Groeneveld, Certified Financial Planner
t. 083 261 9287