Investors who are guided by their emotions risk a plethora of negative results. The emotion-driven activity may counter what they’re ultimately out to achieve. Consider the implications resulting from just one area that emotion-based investing has adverse effects – trying to time the market.
The team at Fidelity Investments crunched some numbers – they tracked a hypothetical $10,000 investment made on January 1, 1980, and tracked the roughly 10,000 investment days since. The results of missing just 0.001% of those days resulted in a 50% reduction in investment gains.
Imagine that! Well, you don’t have to imagine it – the chart is right here. Missing the 5 best performing days in the market resulted in a 35% reduction in returns. While missing the top 50 – a mere half percent, almost negated any worthwhile growth.
Compounding this effect, 6 out of 10 of the best performing market days came in the midst of great market despair – when investor sentiments are at their most negative.
Market downturns are natural and expected, and they’re generally short-lived. Hence the value of having an investment plan and sticking to it.
If you’re an investor guided by their emotions (it’s hard not to be!) you’re at risk of entering and exiting the stock market at the wrong time. Playing perfectly into the buy-high, sell-low trap. Buying when public sentiment and investor confidence is at its highest. Conversely, selling in panic when sentiment is low and investor confidence follows suit.
There are many strategies to smooth out, so-to-speak, the market fluctuations and at the core – focus on time in the market, not trying to time the market. Next, create a simple contribution that happens automatically every month, buying during the highs and the lows and everywhere in-between.
A simple contribution made automatically every month will help you achieve your goals, avoid the pitfalls of emotion-driven investing and you’ll benefit by being disciplined and controlled providing peace of mind and better returns overall.
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What you need to know:
- The concepts offered are based on information available at the time of writing, it is subject to change.
- As always, seek advice from your financial professional, accountant and tax lawyer.
- For more information regarding investing and investment strategy, reach out to our office – we are elated at the opportunity to offer a no obligation consultation.
The information in this article is derived from various sources. We do our best to ensure the sources are both accurate and reliable and – information changes. As such, we make no guarantee or warranty to the completeness of the information presented here or it’s application to your personal circumstances. The concepts in this article are for informational purposes only. Before acting on any of the above concepts, reach out and get a personalized look at the applicability of this and other investment strategies for your unique personal or corporate circumstances.