Sometimes it’s our fear that puts us in danger, not our courage. Take investing, for example. The fear of losing money may keep you in more conservative holdings that may not experience as high of gains that an investment with higher risk may have.
It is important to work with a financial advisor to determine the appropriate risk tolerance for your situation. Behavioral scientists have found that some people are more motivated to avoid loss than to pursue larger increases in their portfolio because of the additional risk that often comes along with it.1
Fear can also take the form of inertia. You may have developed a portfolio well-suited for your needs that balances your risk tolerance with your return expectations. However, over time a portfolio can lose that balance because some holdings underperform while others outperform. This is why it’s important to periodically rebalance by selling “winners” and re-investing those proceeds in assets that reset your asset allocation plan. By the same token, if you hold onto a “loser” for too long hoping it will eventually rebound, it could drag down the long-term growth performance of your overall portfolio.
Another common mistake is to rush to buy investments that are performing well. While it may seem contrarian, investors tend to profit more by avoiding holdings whose price has already increased substantially by the time it becomes well known, and instead invest in a low-valued investment that no one knows about yet. This is the basic principle behind “buy low, sell high.”
One important lesson is to not simply chase returns, but to seek investment control. Consult with a financial advisor to help you design a specific plan of action that helps you work toward your financial independence.
1 Isabella Bank. February 2016. “Conquer the Temptations of Emotional Investing.” Accessed June 22, 2016.
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