As we steadily climb, I dread the inevitable fall. The click-click-click of the coaster on the track rings in my ears with each move up. There is excitement; a nervous energy that builds in my stomach. But I’m not enjoying it because I know what’s coming.
As the coaster tops the hill, there is a moment where we seem suspended, paused. I do not want to experience the drop but it’s unavoidable. I am falling. I am clinging white-knuckled to the safety bar. I’m convinced it will never end and I wish I could do something to stop it. And then suddenly, the ride is over. I did not enjoy one second of it.
My daughter loves roller coasters. Each summer she begs me to take her to Cedar Point the self-described “Roller Coaster Capital of the World,” to accompany her on ride after ride. The ups and downs of the day are the cost of spending time with my daughter.
Amusement Park roller coasters can be fun — at least they are for my daughter. But the emotional roller coaster that some investors find themselves on as they follow the daily ups and downs of the financial markets? Not so much.
The stock market just experienced an unprecedented roller coaster ride. The fastest 30% drawdown in the history of global equities occurred in the first quarter, which was followed by an extraordinary Fed induced advance during the second quarter.
Riding the investing roller coaster isn’t necessarily healthy for your mental state. Dramatic market moves can lead investors to make irrational decisions based on emotions and those decisions often lead to poor long-term returns.
For example, when stocks fall, fear can prompt investors to exit investments after much of the damage has been done. Then, when the markets rise, greed kicks in and those same investors end up buying back in when prices are high. Of course, this is not a profitable investment strategy.
Unfortunately, the 24-7 news culture we live in tends to reinforce emotional investment decision-making. We are exposed to financial news on a non-stop basis, including financial websites that report minute-by-minute stock prices and talking heads on TV telling everyone how to invest their money.
Here are three suggestions to help you avoid the emotional investment roller coaster once and for all:
- Focused on your goals. If your primary investment goal is to save for retirement over the long term, then the short-term gyrations in the stock market will likely have little impact on your ability to reach this goal.
- Don’t pay too much attention to the media. If watching the non-stop media market coverage tempts you to make emotional investing decisions, turn off the TV. This can be especially helpful when the markets are volatile.
- Communicate with your financial advisor. Unlike the talking heads on cable TV or online, your financial advisor is intimately aware of your financial situation, including your investing goals and your risk tolerance. If you feel tempted to make an emotional investment decision, talk to your advisor first about whether this decision is in your long-term best interest.
It's important to remember that at Q3, we employ rules-based investment strategies. That means all of our investment decisions are based on quantitative research. As an active money manager, our investment strategies are designed to increase or decrease your exposure to equities based on changing market conditions. We firmly believe that avoiding emotional decision-making is a key to successful investing. Our approach strives to reduce the size of the drops, so that your roller coaster ride isn’t as frightening as it could be.