Defining your path to a personalized investment strategy and sticking to it begins with self-reflection. There are many things in life that pay dividends; knowing yourself is one of them. I’m not just referring to dividends in the form of payments from company profits made to shareholders, but rather the positive results of decisions you have made in life. Understanding who you are and what you value sets the stage for identifying your goals and defining a path toward achieving them, even when current events and market volatility challenge you to stay the course.
Our emotions can create apprehension and uncertainty in our decision-making and occasionally lead us to question our choices. We’ve all experienced times when emotional volatility may have disrupted our focus, clouded our judgement, or even stifled our cognitive abilities when we needed them most. Losing control in a debate, hastily leaving a job without thinking through the consequences, or making impulsive purchases are just a few examples of emotional reactions, as opposed to thoughtful actions. Through experience, we come to realize that a bias toward rational thinking can be tremendously beneficial to our financial, personal and professional lives, while gracing our decision-making with more positive results over time.
Reflect on some of the choices you’ve made in life that resulted in highly favorable outcomes, not just financially, but to your health and well-being, in relationships, and in your career. You may find at the heart of each of those choices lied some reflection on what you valued, what you aspired to do and be, and how your goals were aligned with your personal beliefs. Avoiding emotional investing calls for a similar approach to decision-making, through careful consideration of your tolerance for risk, your investment goals and purpose, and a strategy that aligns with both. Fortunately, we can take some very practical actions to diffuse impulsivity and give ourselves opportunities to reinforce a more thorough, controlled decision-making process, such as:
- Practicing strategies to manage emotions, that might include avoiding daily evaluation of your investments and being more cognizant of responses to media hype.
- Consulting with your financial advisor, to gain a better understanding of what you are planning to achieve.
- Understanding that while your goals help to define your path, your purpose motivates you to stay the course and get you where you want to be.
- Working closely with your financial advisor, to determine an investment strategy that’s most suitable for you.
Take note of the intra-year declines (blue dots) in the chart below, and the positive and negative total annual returns for the S&P 500 Index at the end of each respective of year. Now think about the emotional volatility that is likely to result from those ups and downs, particularly around maximum intra-year declines and year-end returns.
Investors that monitor their accounts frequently while diving into the abyss of emotionally charged media coverage, on everything from the financial markets to world events, may find it difficult to subdue their emotions when making investment decisions. While the correlation between market and emotional volatility can be strong, history tells us that staying invested and taking a broader, long-term view can be your best choice. As you can see, the number of years the S&P 500 index yielded a negative return in the past forty years is far outweighed by the positive returns in that span.
While this is only one metric through which to evaluate market performance, it does give us a fairly clear picture of the market volatility, wide ranging investor sentiment, and an overall positive, cumulative yield across a forty-year span. It emphasizes the importance of time in the market versus timing the market. Like many other important decisions made in life, managing emotions as they relate to your investment strategy can be just as important as the strategy itself.
At Biondo Investment Advisors, building strong client relationships is one of the most fundamental aspects of our work. Through assessments, ongoing communication and the utilization of intuitive technologies, we work closely with each individual to define their investment goals and determine what they value most. We look forward to continuing that journey with you and welcome the opportunity to discuss our services with your friends, family and colleagues as well. They may reach out to me, or any member of the Biondo Investment Advisors team, to establish their personal investment path.
Luke Barbalich, MBA