Don't let emotions drive your investment decisions

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By Gregory Harris
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02 April 2020, 10:55 AM

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Human beings are hardwired to feel threatened by uncertainty. So when we enter a time of crisis such as the recent coronavirus pandemic, it is easy to react with panic, especially when you feel that you might experience personal loss.

For those who have spent years working hard to build investment portfolios and healthy superannuation levels to see you through retirement, it is normal to feel anxious about how the volatility of the markets may affect these.

Right now, even the markets cannot comprehend the exact impact of something to the effect of coronavirus; it is a one in 100-year epidemic and the actual effects of which upon the economy are fundamentally unknown (Source: Morgans).

And while feeling fear and anxiety around the potential outcomes of this epidemic are natural, we urge you to not let emotions drive your investment decisions.

The roller coaster of investor emotions

The notion of behavioural finance proposes that psychological influences and biases affect the financial behaviours of investors. (Source: Investopedia)

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Right now, some investors are operating within the orange phase – anxiety, fear and panic. Investment decisions driven by these emotions are largely unhelpful for achieving long-term investment success.

Mainstream and social media play a large role in fuelling emotions such as fear and greed, as they urge behavioural impulses based on buying and selling that comes from following market ups and downs.

While you won’t stop yourself feeling the emotion of fear or panic, you can control how you react to these emotions.

We believe the most effective way to manage these emotions is to:

  • understand the risk return trade-offs that apply to various investments and choose those that match your objectives and investment time frame
  • develop a strategy that diversifies your investments to minimise systemic and asset specific risk
  • match your investments to your lifestyle objectives and ensure you hold sufficient funds in low risk assets that can be drawn on when other markets are performing poorly
  • make rational investment decisions by helping to remove emotional influences 

Fundamentals over fear

Over the past few weeks we have seen some investors choose to trade in fear over fundamentals, liquidating their assets for cash. In exponentially uncertain times, it is understandable – but not recommended. Now more than ever we must remember to focus on fundamentals over fear and not let panic blind us.

Volatility and market disruption are fundamentally alarming, but they are not new. We have experienced both before. So, when assessing current financial markets, it’s important to stay focused on the long-term view and our end goals and invest in quality businesses that are resilient to volatility.

Reassurance checklist

Checklists are used to aid decision-making when under pressure, helping to avoid emotionally based decisions which can influence both the nature and the speed of your decision-making. (Source: Vanguard)

We have compiled a checklist which we hope will provide some reassurance and clarity for any decisions you intend to make:

  • Ask yourself “Have my long-term goals changed?” If the answer is no, then neither should your actions that you take now. 
  • Take this opportunity to make sure you understand and are comfortable with, what and how you are invested.
  • Revisit your financial position and be familiar with where you stand. Seek guidance from your Financial Adviser in this process. 
  • Revise your provisions and make any necessary changes if you need to under the supervision of your Financial Adviser.
  • Assess what the potential opportunities are. Gather information from reputable and trusted sources.

Michael Knox, Chief Economist and Director of Strategy of Morgans Financial provided further clarity in his announcement ‘Economic Strategy: The current collapse’, where he is projecting:

“It is likely that the Australian economy will emerge from 2020, rapidly growing. It will not just be physically healthy, but economically healthy.”

“Our best available information is that this epidemic should run its course by the second half of 2020. By the second half of 2020, the Australian economy should again be healthy. We expect that Australian equities will be trading at much healthier levels as well.”

If you are seeking financial and investment advice during this tumultuous time, please feel free to get in touch with one of our Certified Financial Advisers.

Find out more

Greg is a Certified Financial Planner®. He enjoys simplifying the many complexities around investing and assisting his clients to meet their financial needs and objectives. If you would like to learn more about diversifying your investments, you can contact Greg on 02 6583 1735 or [email protected]

General Advice warning: This article is made without consideration of any specific client’s investment objectives, financial situation or needs. It is recommended that any persons who wish to act upon this report consult with their investment adviser before doing so. Morgans does not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions.

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