Too many people who invest get caught up in fear or excitement as markets fluctuate, and that can lead to irrational decisions that risk derailing a long-term financial plan.
Larysa Troyanovska, Investment Specialist at Servus Credit Union and Credential Asset Management Inc., says the financial plan she puts in place with her members is a “backbone”. With the changing tides of the investment market, she always brings them back to it.
All the time, Larysa says, she sees people buying out of euphoria or selling out of depression. That’s where an advisor really comes into play. They can keep you on the straight and narrow. A key strategy for her is a regular portfolio review — at least once per year — so you can refocus your goals.
“You go to your doctor for a regular checkup,” she says. “Why not go to your investment advisor for a regular checkup too?”
The initial sit-down is where an advisor, like Larysa, can gauge your emotional relationship to money. What are your attitudes and biases? What is your background, as well as your financial goals and aspirations? Every person is unique, she adds. They look at money differently, based on their life experiences. Knowing this, she can better identify behavioural impulses for buying and selling.
“You can’t put people into various silos because of their background,” she says. “Every person reacts differently to money.”
Rational decision-making means you can be in a better position to identify investment opportunities, Larysa says. For example, a bear market (when prices are falling and more people are selling) means you can buy at a discount. Getting a financial statement showing healthy earnings can motivate you to invest more and reach your financial goals faster, Larysa adds.
From Larysa's perspective, investment markets have been doing so well for so long that it's easy to forget it’s a cycle. People expect the positive returns to last forever, which is not possible. They can get greedy when there’s an uptick or worry when there’s a down-slide.
“It’s hard not to panic during a downturn,” she says. “If people just pay attention to a statement where they see a drop in the numbers or focus their attention on a single grain of information on BNN or Bloomberg, they can lose focus on the big picture. Trust me, people make bad decisions based on emotion. But that long-term plan can be an amazing line of defence.”
Your age also plays a factor in managing your investing emotions. If you're younger, you may find it’s easier to tolerate a financial downturn. On the other hand, if you're older it's possible you won't be as tolerant of risk and might react differently.
One strategy to reduce your investing anxiety is a “rainy-day fund,” which can be accomplished in a number of ways:
- High-yield savings account covering at least three months’ worth of household expenses, either non-registered or in a tax-free savings account (TFSA)
- One-year redeemable Guaranteed Investment Certificate (GIC) with at least another three months’ worth of expenses
- Insurance, including Loss of Employment, Disability, Critical Illness and Life insurance
- Personal line of credit to minimize the impact of unforeseen events
- Home Equity Line of Credit (HELOC)
A rainy-day fund can cover bills and make it easier to skate around any downturn in the markets. This helps you psychologically and keeps you focused on your long-range financial plan.
“Emotions will always be there in a tough market or downturn,” says Jamie Holmes, Investment Advisor, Servus Wealth Strategies and Credential Securities®. “However, managing for the bad times allows you to relax a little when the bad times hit.”
One can’t just invest and hope for the best, Larysa adds. The way around any emotional pitfalls when it comes to investing is to build a foundation with a long-term focus and adjust (if needed) in consultation with an advisor — someone who is there to help you during the good times and the bad.
Mutual funds and related financial planning services are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Servus Wealth Strategies Ltd. is a subsidiary of Servus Credit Union Ltd. offering financial planning, life insurance and investments.
® Credential Securities is a registered mark owned by Credential Financial Inc. and is used under license.