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Keeping a cool head when investing in the stock market

Wilson Luna

The recent financial downturn has led a lot of investors to make poor investment decisions. The vast majority of people rushed to get rid of their stocks at rock-bottom prices, missing the subsequent upswing that we’ve seen in financial markets in the last few months. If you’re going to avoid getting caught in the stampede when the investment community is bolting for the exits, there are a few things that you’re going to need to know.

First of all you need to understand that the media is not your friend. Media interests are generally completely contrary to your interests as a long-term investor. They need you to tune in every day, and the best way to create great ratings is by harping on about ‘bad’ news in the stock market – it’s a volatile and highly emotional topic that’s sure to have nervous investors glued to their screens. This media frenzy totally contradicts the reality of stock market trends – if you study the history of financial markets you’ll see that they are in a positive position four out of every five years, and this fact can only encourage an optimistic long-term outlook. The other fact you need to consider is that the majority of TV you watch is funded by advertising revenue, and most of the advertisers paying to get their message in front of you on TV are going to have an agenda that’s aligned with their best interests, not yours.

The second thing that investors need to understand is the difference between an actual loss and the practice of enduring normal market volatility – riding out the troughs to reach the peaks. If your portfolio goes through a decline in value you actually don’t lose anything unless you try to sell your way out of it and dump your stocks for a lower price than you paid for them. If your portfolio is sufficiently diversified and consists of high-quality holdings it’s highly likely that it will rebound when market stability returns and you’ll recoup any ‘losses’ that you incurred as a result of the dip in the market. It’s important to understand that you own a share of the holdings of the companies that make up your portfolio and that an upward trend continues over time while declines are only temporary.

Finally – and most importantly – you need to put yourself through an ongoing program of mental toughness training that will overpower any emotionally motivated actions you might be tempted to take. To do this you need to have an organised method for reminding yourself exactly how long-term your goals are and how resilient the equity market has proven to be over time. In the short term the stock market can be extremely volatile, but unless you’re into day trading these daily bumps shouldn’t impact your long-term investing perspective, and the market has traditionally been one of the best ways to meet long-term goals, far outperforming other options such as fixed income investments. Naturally, past performance is no guarantee of future results, but the historical data is useful when considering your investment decisions as it gives you the ability to anticipate which strategy will lend itself to the highest probability of success. Even after factoring in inflation and taxes, the equity market is historically unmatched in its ability to maintain your purchasing power over the long term. So having the mental strength to ignore your emotions and manage your investments logically, accepting that a dive in the market has never been irreversible and fighting against your instinct to sell when share prices plummet will enable you to stay in the market long enough to achieve your financial goals in the long term.

Effective investing goes against everything that human nature pushes us to do. Every emotional response in our system screams at us to get out when we start ‘losing’ money, but 99 percent of the time this is the wrong action to take. Fear, uncertainty and greed will cause most investors to get out of the game at the wrong time, resulting in below average investment returns and a poor investing experience. But aggressively tuning out the media machine, maintaining a logical and mature perspective about the difference between an actual loss and a paper loss, proactively fighting to maintain mental toughness and taking the advice of a reputable financial adviser who has experience in investing will allow you to achieve the investing results that most people only ever dream of.

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Author's Biography

Wilson Luna is an author, wealth adviser and founder of Your Family Your Money. Your Family Your Money’s goal is to simplify traditionally complex financial strategies, demystify financial jargon and debunk common financial myths, becoming every family’s first stop for financial advice, information and inspiration.