Don't panic. Here's how to keep your emotions out of your investment decisions
It's normal to panic. The key is not to act on it, says psychologist Brad Klontz. Here are his techniques to stop emotions from ruling your financial life.
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The ups and downs of the stock market may have you tempted to make changes to your portfolio.
Yet time and again experts will tell you to never let emotions drive your investing decisions.
This week, fear may be a factor for investors watching developments between Russia and Ukraine. Russian President Vladimir Putin said Monday he would recognize the independence of two breakaway regions in Ukraine, and later ordered forces into those territories.
The market was unsettled on Tuesday, following a week of losses by the major averages.
However, sudden declines and sharp rises in the stock market are a normal part of the investing journey, said financial advisor Mitch Goldberg, president of ClientFirst Strategy in Melville, N.Y.
"It's what you do before a plunge that counts, not the hasty reactions that come during and after, when you have no time to think," Goldberg said.
While market experts said they didn't see evidence of panic in the market, it's normal for people to feel that way during heightened volatility, said financial psychologist Dr. Brad Klontz, associate professor of practice in financial psychology and behavioral finance at Creighton University Heider College of Business.
Those feelings have to do, in part, with the emotional brain being bigger and more powerful than the rational brain, he explained.
"Go ahead and panic," Klonz said, "[but] don't panic about the fact that you are panicking."
In other words when it comes to the stock market, acknowledge your emotions — but don't act on them. That goes for whether you want to sell during a big drop, or buy in during a surge.
Of course, refraining from acting may be easier said than done. Here are some techniques to calm your emotional brain so you can make more rational decisions.
When the stock market dives, remember that this isn't the first time it's happened.
"The stock market has overcome so many obstacles," said Goldberg, pointing to 9/11, the Great Recession and the market crash of 1987.
Put some time between your impulse to act and your behavior.
Brad Klontz, financial psychologist
"What happened each time? The stock market recovered and claimed new highs."
Klontz, who is also a certified financial planner, agrees. In fact, he said younger investors who have only witnessed a bull market are more prone to become emotionally charged during times of prolonged volatility.
"They never had this experience," he said.
What's more, consulting with a financial expert will not only help you evaluate the accuracy of your thinking, it also gives you something else you need: time.
If you can't afford a financial advisor, at least speak to somebody before you make an investment decision, Klontz said. That is, as long as they are not also panicking.
"The goal is to put some time between your impulse to act and your behavior," he explained. "If you can put some time in between those two things, you are more likely to calm down your emotional brain, engage your rational brain and make a good decision."
Consulting with an expert will also give you an opportunity to reevaluate your approach to investing and assess your risk level. Perhaps your portfolio isn't as diversified as it should be.
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