Don’t Let Your Emotions and Fear Influence Your Investments

Keep a level head. Your wallet will thank you.
Geber86/iStockphoto.com

Geber86/iStockphoto.com

Are you afraid of how the drop in global oil prices might impact your investments? Do you worry about the results of the 2016 election affecting the market? Chances are, the answers are ‘yes’ — and if you find yourself feeling emotional about market conditions, you’re not alone.

According to a 2014 Inc. article titled, “How to Remove the Emotion from Decision-Making,” it’s common to make bad decisions based on emotions. In fact, emotions often crowd out objectivity, the article states. But how much should you listen to your emotions when making decisions about your finances?

While your emotions might be helpful in certain situations, such as negotiating a contract, when it comes to investing, you need to remove your feelings from the equation. As a financial advisor, I know this is easier said than done, especially at the extreme spectrums of market performance or during times of uncertainty. UBS’ 1Q 2016 Investor Watch report, “The Conflicted Investor,” found that nearly a quarter of investors think the recent market volatility signals the start of a longer-term recession, with 42 percent saying current market conditions remind them of the 2008 financial crisis. We all remember how we felt when the market crashed just a few years ago, and I expect that many investors will listen to their emotions and memories tied to the recession when making financial decisions today.

Unfortunately, this is exactly what investors should not be doing.

It’s important to remember that the economic cycle is just that – a cycle. On April 9, 2009, the market bottomed out, which led to the third longest bull market in U.S. history, according to CNN. After a strong seven years, we are due for a bear market at some point – it’s all part of the cycle.

The Investor Watch report found that 68 percent of millennials and 52 percent of Gen Xers who were surveyed regret not investing more in the stock market as it was recovering — and we can assume their fear is what led to such decisions. So how can you invest without making emotionally-tied mistakes? How do you ignore that nagging feeling that you should act fast in response to, say, oil prices plummeting even further than they already have? Simple — have a plan and stick to it.

Ninety-seven percent of those surveyed in the Investor Watch report agreed that their financial plans help them stay focused on long-term goals rather than daily market fluctuations. In my opinion, a strong financial plan built around goals is an investor’s best asset.

In your financial plan, risk profiles should vary based on the goal of each individual account. Consider a family of four whose children are just a few years away from going off to college. In this case, the college savings account should be very conservative, as the family will need that money relatively soon. However, the retirement fund can have a more intermediate level of risk, as they still have 10-15 years to save. Regardless, I would advise that the family have cash reserves on hand so they don’t need to dip into long-term savings during an unexpected time of need.

In contrast, a young millennial’s retirement account can potentially assume far more risk as he or she may have nearly 40 years to save. If that millennial hopes to buy a house in a year or two, however, I would suggest considering CDs in their investment mix based on suitability, which are generally considered a safe, conservative investment outlet.

Millennials present an interesting case study on how emotions can impact investment strategies. Unfortunately, millennials are the most risk adverse generation because they were particularly scarred from the market crash in 2007. The Bureau of Labor Statistics reports that the unemployment rate peaked at 10 percent in October of 2009, reaching 13 percent among millennials in 2010. Many millennials were just entering the workforce at this time and if they were able to get a job, many were the first to feel the effects of mass layoffs. As such, they still recall the trials of that time. Today, I see millennials’ fear of risk affecting their investment allocations. It is critical that this generation educates themselves on the market cycle and evaluates risk based on the amount of time they have to save, implementing a long-term plan rather than relying on emotional reactions.

Implementing a financial plan can help prepare you for unpredictable short-term market movements and making decisions in a panic. Without a plan, many investors may find themselves buying high and selling too low. However, I believe that it’s prudent to remain invested in the long-term, rather than trying to time the market. Sticking to this strategy can help you reach your goals and objectives.

Bradford Bernstein is a senior vice president of wealth management with UBS Financial Services Inc. He can be reached at Bradford.bernstein@ubs.com.