If you’ve followed markets or financial news, especially in the past few years, you may have felt certain emotions when your portfolio makes a big jump or declines steeply. When markets keep going up, emotions can start to creep in and tell you to overweight your risky assets. It can start to feel like you’re leaving gains on the table by not rebalancing your portfolio to include the ultra-high growth assets that saw big jumps. The desire to get as much as you can from your assets is normal, but if you let it influence your decisions, you could end up risking more than you can afford to lose. In the event of pullbacks, you may see deep declines and might not have the time needed to benefit from a rebound.
The age-old saying, “past performance doesn’t indicate future results,” is all too true. Especially now, when we’ve seen the years of historic market gains seemingly come to an end, it comes as a reminder that markets don’t always go up, and the value of protection and safety in your retirement investments is of the utmost importance.
How To Avoid Emotional Investing
Emotional investing is a mindset that’s difficult to learn how to manage. It’s not as easy as reading a textbook and knowing what to do – it takes self-control. So, it’s important to keep your impulses in check with a clear plan that has dos and don’ts and avoid jumping at a hot stock tip or rebalancing your portfolio to make a bet on an asset you don’t fully understand. It’s okay to have risk exposure in your portfolio. But you should examine how much you are comfortable risking for the potential of large gains.
To mitigate the effects of emotions on your retirement portfolio, make sure your portfolio is properly diversified based on your risk tolerance. Portfolio diversity can be a key to achieving a balance between growth and safety.
Why Diversify Your Portfolio?
Essentially, portfolio diversity refers to a balance between high-risk, medium-risk, and low-risk assets across sectors, industries, asset classes, and strategies. For example, a retiree may allocate a portion of their portfolio to assets to high-growth technology stocks, while another portion of their portfolio is allocated to consumer staples stocks that pay dividends. You may also want to diversify across asset classes such as real estate or bonds. The more you diversify, the more protected you become against a downturn in the broad market or in one sector. You also don’t have to choose one or the other, which makes it a good way to address the emotions you feel when part of your portfolio is rising more than the rest, given that you can still allocate a portion of your portfolio to risk-tolerant assets.
There are plenty of ways to address emotional investing, and it’s encouraged to talk about how to avoid it with a financial professional. We focus on working with you to understand your unique financial situation and goals and turn that into an actionable strategy that can help you achieve the retirement you want. Talk to us today for a complimentary review to get started.
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