Dec/11 – Controlling your emotions helps you to make sensible decisions
Investors want to make money, and they don’t like to lose money. It is well known that you feel the pain of a loss by 2.5 times the feeling of joy that you get when you make a gain.
Why then does greed drive investment decisions?
Elsewhere on our site we include some quotes by Warren Buffett, one of my favourites is:
“Be fearful when others are greedy and be greedy when others are fearful.”
If things are going well, you can fall into into a false sense of security. The market keeps going up and so do our investments. This is a dangerous time; you get cocky and take on more risky investments in an attempt to increase your returns.
That is why it is a good idea to use an independent financial adviser to help you with your investments. They are not emotionally involved with your investment so they can recognise the signs that a bubble could be emerging.
Your IFA will know your risk tolerance; you lose sight of this when you are making money.
They understand the potential return that you should expect for the risk that you are prepared to take. They implement a strategy for managing the risk.
They can periodically rebalance your portfolio to keep it within your risk profile, for example if you have a 5% exposure to emerging markets and then, because of a good period of return from this sector you find that your exposure has grown to 10% you may be tempted to leave it as it is because it is doing well. Your adviser will take the non emotional decision to reduce that exposure back to 5% by reinvesting the gains into more cautious funds.
By engaging an IFA to look after your investments you can look forward to enjoying the rewards that your attitude to risk should enjoy over the medium term.
It may not be as much fun as you will get doing it yourself when things are going well but at least you will be able to sleep at night during the inevitable periods when the markets are volatile.
If you would like to discuss how we can help you to manage your investments please contact us.