"A mad player is a bad player." That's what sports commentators say when an athlete's emotions go haywire mid-game and negatively affect performance. The same thing can happen to investors of any experience level. High-running emotions cloud your judgment and short-circuit your normal, logical decision-making process.
Unfortunately, turbulent markets fuel those emotions. And after a 10-year bull run, 2020 has been a lesson in turbulence. First, the S&P 500 dropped 30%. Then, we've had a rocky climb back to recoup much of those losses. If only that were the end of the story, right? Unfortunately, the economic effects of the coronavirus pandemic are still playing out, and there's the chance of a second Great Lockdown if COVID-19 cases spike again.
To make sure you're ready for whatever market conditions lie ahead, it's time to tune up your emotional resilience. Here are four strategies that'll help you do just that.
1. Establish your rules
What's your investing style? If it's buy-and-hold, your rules are fairly simple. For example, you don't trade based on market conditions. You deposit and invest the same amount each month to increase your positions in the same five mutual funds. And, you maintain your 70/30 split of stocks to bonds by rebalancing every year. Or, if you are trading more actively, your rules may specify what industries you like, what metrics you track, and most importantly, when you buy and when you sell. For example, you take profits when a position is up 20% and cut your losses when a position is down 20%.
Defining those rules and following them minimizes subjective decision-making, where emotions can push you to act in ways that don't fit your goals. And yes, following your own rules now and again may turn out, in hindsight, not to have been the best decision. But those less-than-ideal decisions will be more than balanced out by actions that do go your way -- because you are reducing your dependence on hunches and gut feelings.
2. Respect your investment timeline
Respecting your investment timeline means investing only funds you don't need right away. If you plan on buying a home next year, for example, putting your down payment savings in the market isn't investing in any economic climate; it's gambling. There's no way to keep emotion out of that equation, because you've put your future home purchase on the line.
Stay sane and keep your stress level manageable by following these guidelines:
- If you need the money within a year, keep it in cash savings.
- If you need the money within one to three years, keep it in cash savings or a CD.
- If you need the money within three to five years, keep it in a CD or a very conservative fund like Vanguard Life Strategy Income (NASDAQMUTFUND:VASIX).
- If you need the money within five to seven years, try a conservative growth fund like Vanguard Life Strategy Conservative Growth Fund (NASDAQMUTFUND:VSCGX).
- If your timeline is beyond seven years, you can pursue a more aggressive, equity-focused strategy.
3. Limit account check-ins according to your strategy
Set a limit on how often you check your account. That limit should be appropriate to your timeline; if you're investing for retirement in 2040, and your contributions are automatically invested, for example, you only need to review your account quarterly -- and that's mostly to check your allocation, increase your contributions, and make sure your information is current.
There are two advantages to low frequency check-ins. First, you won't react to every swing up or down in your portfolio's balance. And second, as long as you're contributing regularly, you should mostly see upward momentum. Daily account reviews will show you incremental changes, which make it easier to lose sight of the growth.
4. Write down your goals
Finally, write down your investment goals in very specific terms. Emotions like greed and fear sneak in when you're worried about what's happening right now, but shifting your focus to the future can help quiet those inner voices. Document the amount you want to save, and by when, and stay focused on that end game.
Less emotion for better decisions
Emotional decision-making usually doesn't work out well -- for athletes or investors. You can keep your head level by building as much structure into your investing process as possible. Set rules for yourself, and follow them. And when you feel the urge to break or bend your own rules, revisit your goals and timeline. Let those be your guide.