Investment Guide: The Psychology of Investing

Whether you're a sophisticated investor or just getting started, you'll find one of the most difficult hurdles to overcome is the psychological element of investing. In search of higher returns you'll have to assume greater risk, and with risk comes volatility (the periodic increase and decrease in the value of an investment). It seems that no matter how well we prepare ourselves for the volatility of aggressive investments, when that statement comes in the mail indicating a significant loss for the period, we want to invest more conservatively. It's human instinct to have the urge to sell an investment that's losing money - before you lose more! However, when the market goes down, it's time to remind yourself of your long-term strategy. Here are some thoughts to consider when the market heads south:

  1. Think long-term, investing for retirement is generally a long-term proposition - probably the longest-term investment you'll ever make. Your stock mutual funds are long-term investments, you're not going to spend all of your money in the near future, and therefore you're not forced to sell right away. Leave the money invested and give it a chance to produce a positive return.
  2. Since 1926, the stock market has produced positive returns annually nearly 70% of the time - that means 30% of the time the annual returns were negative. When you know this going in, you can prepare yourself mentally for losing periods. You should know with all certainty that there will be periods of loss when you invest in stocks - it's inevitable.
  3. You don't invest in the stock market seeking the negative returns historically produced 30% of the time - you're investing long-term for the positive returns. Don't make the mistake of second guessing your long-term strategy over a short-term loss. Only you can make the decision to accept a negative return, or seek a positive one.
  4. If you sell your investments that are losing money what will you replace them with? An option that's too conservative for long-term investing? If you panic and sell your long-term investments short, you'll probably find yourself buying back into the same stock funds you sold a few years earlier - only now, you'll pay more for the shares because they've probably increased in value.