How to Keep Your Cool When You’re Investing

Alden Wicker
Posted

Fidelity If someone took half of your money and tossed it off the side of a cliff, would you be relaxed about it?

Our guess is probably not.

But that’s exactly the way it can feel when the stock market is going off the cliff. Your Twitter feed is blowing up with panicked headlines, MSNBC is showing a painful play-by-play of the financial carnage, and when you check your 401(k) or brokerage account, the money you’ve “lost” makes your heart race.

Of course, on the flip side, it’s just as easy to get caught up in the euphoria of a record-breaking stock market. Both situations—a steep drop or a big bounce—can roil your emotions, making you think that you need to do something. Anything.

But emotional investing is never a good idea—those who give into their fears (or greed) tend to buy high and sell low, which is the opposite of a good investing strategy. So we talked to LearnVest Certified Financial Planner™ Brandie Farnam to find out how she keeps her own clients calm when stock market chatter gets to be too much.

Keep Your Investing Cool Tip #1: Don’t Be Impetuous

“None of us have a crystal ball to tell us exactly where the market is headed,” Farnam says. And that includes professional investors, who have access to sophisticated data and analysis. So if, as an average investor, you’re trying to make a quick buck by timing your purchases and investment sales to sudden stock market ups and downs, the reality is that you’ll probably end up losing.

RELATED: Why Playing the Market Will Always Lose You Money

In fact, studies show that investors who try to consistently time investing decisions to the market tend to buy high, sell low and underperform the market. In other words, they make less money than investors who buy and hold.

Your Take Away: Don’t make investing decisions based on what you think the market will do.

Keep Your Investing Cool Tip #2: Think Long-Term

“We don’t recommend investing with less than a five-year time horizon,” Farnam says, pointing to the last five years as a poignant example.

Let’s say that, five years ago at the end of March 2008, you invested $20,000 in the U.S. stock market, with a plan to pull out those funds a year later to use as a down payment on a house. But when the time finally came to sell your investments 12 months later to close on your dream home, the market was down about 40%.  You would have locked in a staggering loss of over $8,000. Ouch. 

But if you were operating under a longer-term time horizon plan of five years, you’d be selling that investment today for a net gain of more than $3,800despite all of the market turmoil that’s occurred over the past five years.

Your Take Away: If you have a longer-term horizon plan in place, when you jump into the market matters less because it has historically gone up over the long term.