Stop emotions controlling investments

People do some silly things with money, but most of them are driven by three emotions. Greed, ego and fear. While you can’t eliminate your emotions, you can put in place things to mitigate their impact.

Greed is responsible for people having the wrong investment portfolio to start off with. These people generally have a very high percentage of high risk investments, often with a lot of leverage. For many this can be OK if they can hold their emotions in check during market falls like we have seen recently. While this can pay big dividends in the good times, it can also lead to people losing everything.

Ego is responsible for people thinking that they can do better than everyone else. This can be compounded if they stumble onto an investment that does well, as this will cement in their mind that investing is easy. These people need to know that professionals that run managed funds only beat the market average 25% of the time (which is why I don’t recommend managed funds). If these professionals with big teams behind them can’t do it, there is very little chance that someone who may dedicate a few hours a week will be able to.

Fear is responsible for people either not making any decisions or making the wrong one. On one end of the spectrum this includes people thinking they are avoiding all risks by having their funds in fixed interest investments. On the other hand, they put all of their investments into high risk investments and when the market crashes sell and crystallise their losses. Worst still, are those people that ignore even looking at it in case they make the wrong decision.

There are several ways to avoid making these mistakes.

The first is to have a diversified investment portfolio. This should take into account both your need to take risks, and how you would handle a market fall. If you are after the thrill of investing, you could do this with a small percentage of your overall portfolio. This way if you lose it all, it won’t impact your longer term goals. When you develop your investment strategy, make sure that it helps you achieve your life goals, and isn’t only focused on getting the highest returns.

The second is to have someone else manage your investments. This is not something most people need. However, if you are someone that gets emotional about your investments and have a history of making bad decisions, this is something to consider.

Finally, and this is easier said than done, is try to ignore the media. The media want you to read their articles. The best way to get people to do this is by creating fear. There have been hundreds of articles written over the last six months about how much the stock market has fallen. Very few talk about how much it has gone back up.

So, to finish off, I will give you a few facts that show that while 2020 has been a rollercoaster year, it is not as bad as the media have made out.

1. A diversified balanced index fund has given net returns of nearly 2% in the 2019-20 financial year. What’s more, it has had annual returns of just under 8% over the last decade.
2. The median growth investment option across all super funds lost only 0.5% in the 2019-20 financial year. Balance this out with the fact these same investments have provided annual returns of 8.3% in the last decade.