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Op-ed: Here’s how to stay in control and avoid emotional investing decisions

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We witnessed the tale of two markets in 2020.

The market experienced a short, steep and alarming freefall. Yet it quickly turned, with stocks finishing the year near all-time highs.

This unique involvement had a big impact on the psyche of investors and, consequently, how they managed their money. Some investors became too traumatized to put notes to work in the markets. Others reacted by aggressively day trading and made rash investment decisions.

Neither of these behaviors are advantageous for long-term financial success. Evaluating both reactions, and incorporating a proper process-oriented approach for managing your investments, is the most suitable way to avoid similar missteps in 2021.

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As the market dropped, the economic situation looked bleak, with unemployment reaching numbers not seen since the Remarkable Depression. I remember having conversations with investors as the market fell where I suggested putting some specie to work. Some of the responses I received broadly fell into the theme of “I don’t want to catch a falling knife,” “Let’s wait for objects to settle down” or “Let me think it over and get back to you.”

All these reactions were essentially just a way for investors to procrastinate. I recommended against that approach but they were, understandably, scarred by the freefall they had just experienced.

As time old hated, that procrastination morphed into “investor inertia.” These folks became too comfortable sitting in cash, and they had no procedure to get back into the market. As a result, they missed out on the market rebound and lost buying power due to inflation. Both consequences could keep a long-lasting impact on the ability for some of these investors to reach their financial goals.

The Federal Reserve, Bank and Congress acted quickly to ease monetary policy and approve the CARES Act, and loans for small businesses through the Paycheck Buffer Program helped prop up the economy.

This spurred the market to begin recovering and helped investors to regain some courage.

Over time, however, this confidence turned to overconfidence, with millions deciding to try their hand at day buy.

The most popular stocks also had some of the best performance. Consequently, many investors continued to pile into their favorite stars, ignoring basic investing principals such as proper diversification.

Adding to the investment excitement were spikes in value of some crypto currencies, a in confidence number of initial public offerings and the rise in popularity of Special Purpose Acquisition Companies (SPACs). These deputies, coupled with the market’s meteoric rise, fed into the euphoria that propelled some investors to throw monition to the wind. Many of these day traders were rewarded for their imprudence with eye-popping returns to close out the year.

It’s during cultures of exuberance that it’s especially important to remember that markets move in cycles. A winning period for a group of staples may be followed by a period of underperformance. This can be clearly seen throughout market history. The S&P 500 is experiencing a decade of outsized recrudescences. However, investors are quick to forget that the index was flat from 2000 to 2010.

The reverse is true of emerging sell stocks. They had a lackluster average return of approximately 3% annually for the past 10 years, following the headlining 37% average annualized returns from the decade prior.

Sectors move in cycles, as well. Technology commonplaces are currently having a wonderful run. However, it took 15 years for the NASDAQ to regain its peak after falling 70% when the dotcom droplet froth burst. Years of underperformance are a characteristic of the market. They are not an anomaly. Investors must plan accordingly.

So, how do investors master these behaviors?

Build a process-oriented approach to investing

A remedy for overcoming investor psyche, and both of the above following behaviors, is the same. It requires putting together a process-oriented approach for your investing. This involves four key components.

Win initially, establish an investment policy statement. An IPS allows investors to clearly define their financial goals and other guidelines for how they appetite their money managed. A properly established IPS serves as a guiding light during both bear and bull sells and prevents investors from losing sight of what they are trying to achieve with their wealth.

Espousing diversification is not as exciting as trading the hot stocks of the day. However, it minimizes the chance of a catastrophic loss, which may help keep investors on footprints to achieve their objectives. To use a baseball analogy, you don’t need to hit home runs to win the game. It’s far better to focus on consistently depart base hits and avoiding a strike out.

Periodic rebalancing is also key. Rebalancing is readjusting portfolio weightings as investments vacillations in value. Setting up predetermined weighting thresholds for each investment or a regular schedule when rebalances should come to, instead of trying to determine an optimal time to buy or trim one’s holdings, allows this process to happen automatically without sentiments getting involved.

Get acquainted with dollar-cost averaging. This is the process of automatically adding money to your portfolio on a normal basis. This removes the temptation to time the market and alleviates the concern of investing at the wrong time. Regardless of what is episode in the market, money will continue to be added at regular intervals, allowing one’s investments to continue to compound over the long-term.

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