Emotions and your portfolio

2022 has most likely been a difficult year in your portfolio. As of December 8th 2022, the S&P 500 is down nearly 18%, while the US Bond index (AGG) is down nearly 15%. During these periods of volatility, it is essential to evaluate how your emotions can affect the long term returns in your portfolio.

Your portfolio should be custom to your personal situation. Financial Professionals consider your personal risk tolerance, goals, income, time horizon, and several other factors before building a diversified portfolio. As you can see there is a lot of legwork that goes into customizing your portfolio, and you should not make drastic changes to your portfolio based on emotions. This article will explain the types of emotions that can present themselves when investing and how you can manage them as they come up.

Emotions and investing:

There are two primary emotions that investors feel when evaluating their portfolio; fear and greed. Although these emotions are very different in nature, they both can significantly harm the long-term performance of your portfolio.  

Fear tends to present itself during times of volatility. You may turn on the television one day and see that the “Market is having its worse day since 20XX.”, and begin to feel fearful. Fear leads investors to irrationally place trades with the hopes that they are cutting their losses now and will get back into the market when the news brightens up. The problem with selling your investments during market downturns is that no one can time the market. Take a look at 2009 for example. The S&P 500 fell 48% in a little over 6 months ending in March 2009. If investors would have sold in March, they would have forgone the cumulative 41.52% return that the index produced in 2009 and 2010.

Greed tends to present itself during times where the market producing generous returns. You may check social media and see a post saying “Company X has generated an astonishing 194% return over 3 years with significant upside” and think “I want to get in on the action now!” The issue with investing in companies solely because of their investment returns is that you may invest in companies with unsustainable business models, or your investment in said company may not fit into your current asset allocation.

How to Manage Emotions and Your Portfolio:

1. Give yourself time to think: If you are considering making a drastic change in your investment lineup, take a few days to evaluate the ‘why’ behind this decision. Ask yourself questions like “Do I understand this change?” “What is leading me to consider this change?” “How will this change affect my current investment lineup?”. If your emotions have not changed after a few days of careful consideration, set a meeting with your financial advisor to discuss these changes and how they affect your portfolio.
2. Set a meeting with your financial advisor: If you are feeling uncomfortable when viewing your investment performance, one of the best things you can do is set a meeting with your advisor. Your advisor should take the time to talk through your concerns and come up with solutions to address them if it’s in your best interest.
3. Employ a Dollar Cost Averaging Strategy (DCA): Dollar Cost Averaging is a strategy where you invest equal amounts of dollars into a given investment, regardless of market conditions. In periods of times where the market is lower in value, you could be investing at a lower cost than it’s worth. During periods where the market is producing solid gains, Dollar Cost Averaging allows you to purchase a lower the number of shares since the price of the underlying security is appreciating.
   1. You can use the DCA approach in all account types. It is imperative to consult with a financial professional prior to implementing this strategy. A financial professional will be able to help you choose the best holdings in your portfolio for this strategy, and periodically rebalance your portfolio so it matches your personal situation.  The key to Dollar Cost Averaging is to stick to the strategy at hand. You should continue this strategy as initially planned.

In Conclusion:

It is completely natural to feel some emotions when viewing your portfolio. However, It is imperative to recognize and consider these emotions prior to making any drastic changes to your portfolio. These drastic changes could have the potential to be devastating to your financial future and the plan you created with your financial professional.

Your financial advisor has safeguards in your portfolio for market volatility. They carefully craft a well-diversified portfolio to ensure that your assets are spread among several asset classes, geographic locations, and sectors of the economy. This diversification is personalized to your situation to ensure the risk and return figures further empower you to reach your financial goals. When you are feeling uncertain in times of market volatility, remember this quote that Morgan Housel wrote in his book The Psychology of Money. Housel says. “Volatility is the price of admission. The prize is superior long-term returns.”

Please reach out to your Jones & Roth Financial Advisor if you would like to further discuss how emotions can affect your portfolio.