As the market goes through its cycle, an investor can go through many emotions—everything from optimism and euphoria to fear and despondency to hope and relief. Experts study emotional investing because many people cause harm to their portfolios by making investment decisions based on their emotions. Think of all those who reacted fearfully to the 2008 market crash and moved their money into cash; they missed out on the subsequent upswing.
Fear and euphoria
When acted upon, fear and euphoria are arguably the two emotions that can be most harmful to a portfolio. Investors want to follow the investment principle of buying low, selling high. But when markets rise, euphoria can entice investors to jump into the already-heated market, therefore buying high. And when markets suffer a downturn, fear often leads investors to redeem, therefore selling low.
These temptations are natural. The important thing is not to give in to them. Thankfully, there’s a simple remedy to prevent our emotions from getting the best of us.
Follow this prescription
Making regular investments in a professionally managed portfolio can help you stick to a disciplined approach, thus avoiding any emotional pull that entices you to try timing the market.
This strategy prevents the bad habit of chasing hot securities or funds—a habit that can throw off your asset allocation, which negatively affects your level of risk and portfolio diversification. Trying to catch a quick short-term gain may end up detracting from long-term performance.
Do you ever feel like straying from your regular investment routine when markets rise or become volatile? First, talk to your advisor about it. They can make sure you’re comfortable with your personal investment program.
This communication is published by CI Global Asset Management (“CI GAM”). Any commentaries and information contained in this communication are provided as a general source of information and should not be considered personal investment advice. Facts and data provided by CI GAM and other sources are believed to be reliable as at the date of publication.
Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI GAM has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.
Information in this communication is not intended to provide legal, accounting, investment or tax advice, and should not be relied upon in that regard. Professional advisors should be consulted prior to acting based on the information contained in this communication.
You may not modify, copy, reproduce, publish, upload, post, transmit, distribute, or commercially exploit in any way any content included in this communication. You may download this communication for your activities as a financial advisor provided you keep intact all copyright and other proprietary notices. Unauthorized downloading, re-transmission, storage in any medium, copying, redistribution, or republication for any purpose is strictly prohibited without the written permission of CI GAM.
CI Global Asset Management is a registered business name of CI Investments Inc.