If there is one point that everybody working in the financial sector can agree upon, it’s that markets fluctuate, and investments always carry some risk. While markets dip from time to time, they always recover, and how you can remain ahead is by making sure that you are still present when prices go soaring up again.
For this reason, as much as possible, investments should not carry an emotional burden. In fact, studies have shown that the people who get excited and jump on the bandwagon by buying good performing stock are also the same people who panic when it starts to dip and start selling. Because of their emotions, these investors are unwittingly doing the opposite of what they should be doing, which is to buy low and sell high.
To avoid these common financial pitfalls, here are three pointers to keep your emotions from getting in the way of good investments:
1. Invest only in what you can afford to lose
Over the years, you will have heard someone make the remark that investing is like gambling in the casino. To a certain extent, there is a truth to this statement. They carry significant risks, and the choices you make in both activities can determine whether you make a profit, or lose your capital. The main difference between these two, however, is that with gambling, your opportunity to earn ends as soon as you leave the table. On the other hand, your investment lives on even if the market dips, as long as you patiently weather the storm and wait for it to rise again.
While trying to decide how much equity you’re willing to invest, you should only allocate the amount that you do not need in the short term. If possible, invest only what you don’t need for at least several years. This way, you won’t feel the need to sell your stock in case of a market dip.
2. Focus on long-term growth
Defining what “long-term” means can be relative to an investor’s personal lifestyle, goals, and beliefs. However, it generally means aiming to increase the value of your portfolio cumulatively within several years, usually five to ten years or more.
There are several ways to go about this strategy. One is to look for undervalued companies with strong fundamentals, and wait patiently for a few years until prices soar before selling. This often means weathering several years of under-performance, until such time that the prices are good enough to make a profit. Thinking long term allows you to overcome short-term dips, in favor of long-term gains.
3. Get into dollar-cost averaging
Dollar-cost averaging allows you to control your contributions using predetermined amounts. By making regular contributions, you are investing at different times of the market cycle, instead of letting the highs and lows of the market play on your emotions.
Because you are only allocating a fixed amount, you are able to get solid returns while also making sure that you are not buying too much stock when the market prices are high. At the same time, when the prices are achieving all-time dips, you are still buying consistent amounts of stock that will earn you returns again when the market rises. Compared to making one or two big-time contributions a year, dollar-cost averaging helps mitigate the effects of short-term volatility and helps ensure long-term growth with higher returns.
Financial markets can dip, but they always recover over time. Instead of letting the highs and lows of the market rule your investment plans, make sure that you are investing in products that offer higher yield over long periods to overcome short-term volatility.
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