Recently, a friend who has managed his own investments in the past suggested that I use him as a contrary indicator, saying, “When I’m going into something, lock, stock, and barrel – that’s when you should be selling!”
It’s difficult to navigate around emotions when you’re managing your own money, and it’s especially tough to walk away from an investment that is “on fire” in favor of one that hasn’t been looking quite so good as of late. Standing by and watching your portfolio erode can be even more trying.
To avoid emotional investing, critical thought must be employed to ask – and answer – these key questions when approaching portfolio design:
• At what point are you starting your move towards retirement, or other stated objectives?
• What are the forward-looking expected returns for that period, across all asset classes?
• How will you account for volatility?
• Will you be emotionally able to stick with your plans if your account value has dropped 40%?
• Do you have the foresight and emotional control to navigate through volatile markets?
The ability to set aside emotion, spot and analyze opportunities, and temper enthusiasm during mis-priced markets will likely be well rewarded.
When everyone around you believes that investing is easy, that is the time when big mistakes are made.
Watch what others are thinking. Take into consideration how their thoughts and strategies change the shape and growth of the markets. Make decisions based on logic, research, and critical analysis – not emotion or high spirits. Be willing to go against the grain.
- Greg Stewart, CIO