Investors are under a constant barrage of information that could be a real threat to their portfolio but most likely the information is published with a different agenda. Simply put, click bait. This click bait, or “noise” can cause negative emotions like fear and uncertainty that can be dangerous to an investor in a competitive trading environment. In light of this situation we advise people to act as investors with a long-term plan, not traders looking to make a short-term profit. A trader will use the noise in the markets to make short-term buying and selling decisions hoping to gain from small pricing discrepancies. People who succeed in this endeavor are few and far between. However, we have seen the vast majority of investors who stick with a specific long-term strategy and goal be successful. So what is the difference?
Any good long-term investor will tell you that your first emotional reaction to market news is usually wrong, and studies into behavioral economics seem to corroborate this sentiment. People who succeed in their goals have a common thread. They curb fear and uncertainty and look at the goal as a marathon rather than a sprint. They also have a specific strategy to manage risk that gives them the best opportunity to reach their goal. So what are some tips to stop making knee-jerk reactions and become an investor?
Like any other skill, it starts with training and discipline. An investor can train their mind to be calm in the face of negative emotions. We have distilled this into a three step process. The first step is to recognize the emotion or thought you are having and accept it as an inherent and normal part of the process. Then remember you have a long-term strategy and goal that should have already taken into account short-term risk and volatility. Finally, release the emotion and let it go. While this is a simple process, it is not easy. Mental training is a tricky skill to build because it is not easily measured. It is however something to work towards building and highly rewarding when a goal is achieved. Just remember the 3-steps: accept the emotion, remember the strategy, release and let go.
Another tip is to consider partnering with an advisor that can help navigate complex situations and create a strategy to manage risk. One of the greatest values of a good advisor or coach is to help investors differentiate the “noise” from actual threats to a portfolio, or ideally make them feel confident enough in the risk management that they don’t need to worry about the noise at all. Think of a risk strategy as an anchor, fixing you to the goal, so you don’t get carried away into a sea of decision-making uncertainty. Using the three-step method will help you hold tight to the anchor, and partnering with an advisor will help create an effective one.
Stephen Heitzmann is the CEO of Altruistic Investing LLC, an Algorithmic Virtual Advisor, based in Colorado Springs, CO. www.altruisticinvesting.com Altruistic Investing LLC is a Registered Investment Advisor (Firm CRD# 289016 / SEC#801-110892) with the Securities and Exchange Commission.
This article does not represent an investment recommendation or endorsement of any kind. Please consult with your advisor regarding your specific situation. Investing in securities does involve risk of loss that clients should be prepared to bear. The risks can range from failing to keep pace with inflation to losing some or all of the money you invest.