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Understanding your Emotional Response to Market Fluctuations

Understanding your Emotional Response to Market Fluctuations

March 08, 2022
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The stock market continues to be down, with the war in the Ukraine as the main catalyst, and remains in correction territory, a 10 – 20% drop, which began in early 2022.

Market downturns can take an emotional toll on investors. It’s been shown that investors feel the negative emotional impact of a loss 2.5 times more than the positive emotional impact of a gain, and this response even has a name – Myopic Loss Aversion. Which is to say, it’s completely natural to feel negative emotions when the market is down.  Professional investors experience these emotions just as much as novices, but they react differently (or rather don’t react).  Professionals are conscious to the emotions they are feeling but don’t make impulsive investment decisions to relieve the emotions, they stick to their well-planned investment strategy. Novice investors often impulsively sell their investments just at the wrong time, the market bottom, in an attempt to relieve these emotions, only to be whipsawed by feelings of regret as the market rises.

The good news is you can rise above these emotions and aim for higher investment returns by following these steps:

  • Have a well-defined Investment Strategy for a long time horizon. This is what we specialize in, and every client has a personalized strategy for their portfolio.
  • When the market is down don’t excessively look at your account balances if it fuels your negative emotions. Instead make a point to look at your account values more often when the market is making new highs and inspires you to achieve more.
  • Remember the Stock Market has cycles. The market never simply goes straight up but instead it regularly takes two steps forward and one step back. I frequently write about market cycles in weekly updates and monthly newsletters, and discuss them with clients during meetings.
  • Focus your energy on growing other aspects of your life or finances that you have direct control over.
  • Final Step: I am here to help you - reach out to me with any questions you have or to further discuss the other steps.

Photo by Elisa Ventur on Unsplash

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