Pattie Lovett-Reid: Don't let emotion sabotage your investment decisions
The markets are volatile and trade issues are still front and centre, but it is important for an investor to not sabotage their investment strategy during periods of uncertainty.
Economic, political, geopolitical risk come and go; however; letting your emotions dictate your investment decisions can destroy your potential for returns. It is true fear and greed can move a market but focusing on the bigger picture and longer term can be the difference between an investment gain or loss.
Here are a few strategies to remind you that sometimes doing nothing with a well-crafted portfolio of good-quality investments is best strategy of all.
1. Never fall in love with your investments. You invested to make money. When the fundamentals of the company change so too should your love for the company. Time to sell. You don’t have to buy and hold forever.
2. Don’t be impatient. Slow and steady wins the race, especially if you are an investor versus a day trader.
3. Never invest in a company you don’t understand. Years ago an analyst said to me that if you can explain your investment to an eight-year-old in simple and down-to-earth terms, then you likely have a pretty good idea of what the company is trying to do and have better odds of assessing your investment decision.
4. Market timing doesn’t work. In fact it almost always compromises your returns. Studies have proven returns are driven by asset allocation and not by timing the market or security selection
5. Waiting to sell a loser almost always guarantees you lose – and not only once, but twice. The downside risk is too great to hold on should the stock slide further and the opportunity cost of not redeploying your money for a potential gain creates a double whammy.
6. Diversification works. A general rule is to never invest more than five-to-10 per cent in any one stock. You also might want to be mindful to not have too much concentration in any one company, sector, country or even currency.
The easiest way to ensure you don’t fall into these investment traps is to have a plan, automate your plan, dollar cost average in and out of the market, and find your excitement in other areas of your life. When it comes to investing, I prefer a boring portfolio that steadily makes money over time.
Boring is beautiful.