Personal Finances | The Importance Of Managing Emotions

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The Importance Of Managing Emotions

Making money is not easy. It takes hours, days and years of hard work to accumulate enough money to accomplish our life projects. Whether it's buying a first home, retiring or leaving money as an inheritance, nothing comes easy for most people.

That's why it's important to make sure you invest all that hard-earned money wisely. However, the factor that many investors underestimate in this process is the importance that emotion management can play in the end.

To demonstrate how important emotions play in wealth accumulation, let's compare the performance of the average investor between 1996 and 2015 with the returns on the different types of investments available to that same investor. During this period, the U.S. S&P 500 Index, which measures the performance of 500 publicly traded U.S. companies, returned 8.2% per year. Bonds and gold returned 5.3% and 5.2% respectively. A risk-free U.S. Treasury Bill returned 2.4%.

So it would be easy to say that the average investor has had a return of approximately 2.4% to 8.2%, since we think that all investors' investments together must have some of this? Well no! The average investor earned a return of 2.1% per year. That's surprising, isn't it?

As you may have guessed, what caused this poor performance was poor emotional management. This means that investors bought and sold stocks or funds at the wrong time. They got carried away when things were going well and panicked when things were going down.

The bad moment is when?

In the stock market, the number one rule is buy low and sell high. What many did in the previous example is that they bought when the markets were going great and sold when they were not. Instead of simply investing for the long term and letting their investments work for them.

To prevent this from happening to you, let's look at the 4 important (and easy) tips to follow!

The first trick is very important and many make the mistake despite years of investment experience. It is not to buy a stock or fund just because it has done well lately. When you do so, you are simply following the craze associated with a financial product that performs well. You get carried away and you tell yourself that if it has done as well as it has, it can only continue to rise. Unfortunately, this is not the case and the investor could lose a lot.

Another aspect not to be forgotten is that you should not sell your well-diversified products in panic during a market downturn, especially when you are invested for the long term. You would make the mistake of selling while it's low instead of waiting for it to rise. Of course, if you bought a stock or a fund just because it was going up a lot (as in the previous paragraph) without knowing why you were buying it, you may be panicking and selling it because the unknown is the scariest thing.

The following trick may seem trivial, but just not looking at your investments too often helps a lot in managing your emotions. When we look at them every day, for example, we see all the little jolts of the stock market. On the other hand, when we look at our investments only a few times a year, we are less worried about the daily volatility of the stock market. As they say, out of sight, out of mind!

In closing, one tip that makes a big difference is to deal with a financial advisor. It is the advisor's duty to help investors remain rational at all times. I often joke that a financial advisor should have a double degree in finance and psychology since this is often the most important role in a relationship with his clients. In fact, studies prove that using the services of an advisor allows you to raise more money over the years.

As you can understand, working hard is not the only task to do to raise money, we must be sure to invest it well afterwards and especially to manage ourselves well between our two ears to make this hard-earned money grow!

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