Understand How Fear Can Affect Investment Decisions
When it comes to your investments, "go with your gut" might not always be the best way to go. In fact, it may work against you, particularly in periods of market turbulence. Before jumping to conclusions about your investments, consider what might be influencing your thinking.
Recency bias refers to the tendency for recent events to have a stronger influence on your decisions than more distant events. For example, when the market was in the midst of an 11-year bull run, you may have increased your investments in equities, hoping to take advantage of any further gains. By contrast, if you feel burned by market performance during the past three months, you may be hesitant about continuing or increasing your investments moving forward. Consider that neither of these perspectives may be entirely rational given that investment decisions should be based on your individual goals, time horizon, and risk tolerance.
Loss-aversion bias describes the tendency to fear losses more than celebrate equivalent gains. For example, you may experience joy at the thought of finding yourself $5,000 richer, but the thought of losing $5,000 might provoke a far greater fear. Loss aversion could cause you to hold on to a losing investment too long, with the fear of turning a paper loss into a real loss. In a down market, of course, most of your investments may show paper losses, so you might consider whether you are holding on to an investment that would be wise to sell within the context of your overall strategy.
It's only natural to be concerned when the market drops. But expecting volatility and having a sound financial strategy in place may be the best defense when events beyond your control have a negative impact on the markets. This might also help prevent you from inadvertently stopping your investment progress.
If you think you might be basing your decisions on fear rather than facts, contact MNM Vested, LLC.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.