It’s hard to deny that the idea of investing is an exciting prospect. The chance to invest your hard-earned wealth into a range of assets with hopes of future returns can often seem exhilarating – though with this excitement can come doubt and reluctance.
Indeed, it’s entirely normal to feel a full range of emotions when you have assets exposed to any level of risk. However, it’s important to remember that emotion can often cloud your decision-making.
If you feel emotion has affected your investments at some point, you’re not alone – research from Magnify Money shows that 66% of investors have made an impulsive or emotionally-charged investing decision they later regretted. Similarly, 58% of investors agreed that their portfolios performed better when they left their emotions out of the equation.
Continue reading to discover three ways that your emotions, both positive and negative, can affect your investments, and how working with a financial planner could help you invest based on evidence.
1. High stress can lead to panic-selling assets
If your investments lose value due to market factors outside of your control, this can lead to panic-selling.
Indeed, following the Covid-19 pandemic, markets worldwide experienced a period of decline. One example is the UK FTSE 100 stock market index, which saw a considerable downswing, as shown by the graph below.
Source: London Stock Exchange
As you can see from the graph, the FTSE 100 index fell from 7,675 points on 16 January 2020 to 5,191 by 19 March of the same year. While the index did eventually rebound to its pre-pandemic levels once lockdowns lifted, the path to recovery was relatively volatile.
However, if you allow this volatility to increase your stress levels, you may feel the temptation to panic-sell your investments as a result.
Crucially, if you had sold your investments following the dip in March 2020, you would have missed the subsequent market recovery when lockdowns eased. Cashing in your shares during a downswing means your wealth does not have the chance to recover in those conditions, and your losses are crystallised permanently.
What’s more, historically, upswings have often followed market downturns. In fact, CNBC reports that some of the market’s largest declines have been followed by its greatest rises.
Indeed, research has shown that the market’s largest increase between 2002 and 2022 was 13 October 2008, while the financial crisis was in full swing following the collapse of the Lehman Brothers investment bank.
From these instances, we can learn that although downturns may cause emotional stress in the short term, staying invested could mean your wealth has the chance to recover.
Allowing your emotions to get the better of you during market fluctuations could mean you crystallise these short-term losses and ultimately harm your wealth in the long term. Whereas, using these historic examples to inform your decision-making could help you stay calm when your investments dip in value.
2. Trigger-happiness could mean you invest beyond your tolerance for risk
While the “negative” emotions associated with investing have been mentioned already, it’s important to remember that impulsively acting on your “positive” emotions can hamper your long-term financial wellbeing, too.
In fact, there often exists a “cycle of investor emotions” – a wave of positive and negative feelings you might experience when you invest. It starts with optimism and excitement before turning to worry and doubt, and then the cycle repeats.
Generally, the better markets are performing, the more willing you may be to invest money. This is seen as something of a “comfort zone”, as continued returns can often dissipate the feelings of reluctance you may experience when you first start investing.
Here, irrational exuberance can often come into play, and you may find that you tend to invest beyond your tolerance for risk.
This is why working with a financial planner can often help, as a professional can help ensure that you’re investing sustainably for your long-term vision.
3. Short-term temptations can cloud your long-term investment vision
Investing is, more often than not, a long-term journey that requires a considerable amount of forethought.
As such, it may be wise to keep your long-term goals in mind and try not to give in to short-term temptations that could damage your potential investment growth.
This doesn’t mean you should avoid all luxury purchases altogether – you work hard for your wealth, and deserve to spend it on things that make you happy. But, if you consistently cash in your investments to realise short-term desires, you could hinder your portfolio’s overall investment growth.
To solve this, it may be worth separating your cash savings and investments into short-, medium-, and long-term goals.
It could be constructive to see your cash savings as your short-term emergency and luxury fund, while viewing your investment portfolio as part of your medium- and long-term plans, such as helping children onto the property ladder, or funding your retirement.
By separating the two, your short-term spending shouldn’t interrupt the growth your portfolio could experience over the years.
Ultimately, it may be prudent to speak with a financial planner to stop emotion from interfering with your investment decisions.
We can provide:
Long-term observations of market trends
Detailed breakdowns of market forecasts
Access to cashflow modelling software that helps you set long-term financial goals
Bespoke advice on creating a balanced portfolio designed to match your appetite for risk, time frame, and growth targets.
We can discuss the emotions commonly associated with investing and help you learn from your previous experiences. Our qualified advice can guide you along your investing journey, providing peace of mind every step of the way.
Get in touch
To find out how we could help you invest with confidence, please email firstname.lastname@example.org or call us on 0208 882 2979 for more information.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority do not regulate cashflow planning.