Every day, we all face a new set of choices we must make. Do I wake up when my alarm goes off, or do I hit snooze for a few extra minutes of sleep? Is it going to be warm or cool outside today and how should I dress? Do I hit the gym before work or take a day off? Whatever the circumstances may be, the decisions you make are what you perceive to be best for you.
These everyday choices show something important about how we make decisions. We all try to do what feels best at the time. This same pattern shows up when we invest our money but with much bigger consequences. Let's look at why mixing money with emotions can create problems.
Money and Emotions
Buy low, sell high! Sounds simple enough, right? However, this concept becomes very difficult for individuals when it comes to their money. During good times when the market is up, the good feeling that comes along with that can often influence someone to want to put more money into the market. However, the bad feelings associated with market downswings can sway investors toward selling out and “protecting” their assets. Opinions and reports from media journalists and analysts on a 24/7 news cycle can often push investors to act emotionally rather than do what is best for them.
Market Volatility
Investing in the market is predictably unpredictable. On any given day, one analyst may predict the market to rise, while another calls for a drop. And at some point, both analysts will be correct. In today’s global economy, an unexpected event can change the barometer of the market overnight. These events could be anything from an act of war to an outbreak of illness or any variety of political events. The violent short-term price swings that often accompany these episodes also have a direct impact on the investor psyche. These market reactions—or overreactions in some cases—often create opportunities that you may miss if your emotions get in the way.
Market Corrections and Crashes
Most of us can remember a time when the market went down. There was Black Monday and the 1987 stock market crash. There was the tech bubble in the early 2000s. In 2008-09, there was the financial crisis. The covid pandemic in the early 2020s brought a huge whipsaw to the market. There have also been numerous short-term corrections in between these events. Each of these has a negative connotation attached to it. However, you can look back on each one of these downturns and see what would have been some terrific buying opportunities.
Investing in a Downturn
So now we can answer the key question at hand: how can we take action? Let’s say you go to the store and find a new outfit you like, or you go to the dealership and find a new car. Both are exactly what you want, but they are listed at full sticker price with no discounts available. More often than not, you will wait for these items to go “on-sale” before making your purchase. It only makes perfect sense for you to purchase the same product at a much cheaper price. Investing in the market isn’t very different. Each investor has a set of investments that are appropriate for them. These investments may go “on-sale” during a market downturn, creating an opportune entry point. The quality of the investment should line up with your risk tolerance and your needs and goals. You shouldn’t allow short-term news to affect your intermediate to long-term plans. When appropriate, you should be ready to buy low so that you may have the opportunity to sell high.
Market ups and downs will always be part of investing. The key is not letting fear or excitement drive your decisions. By understanding how emotions affect your choices, keeping your long-term goals in mind, and working with an advisor who knows your situation, you can turn market downturns into opportunities. Remember, successful investing isn't about trying to predict every market move. It's about sticking to your plan when others panic. In the end, those who look past the headlines and stay disciplined during volatile times are the ones who come out ahead.