Taking the emotion out of investing

This year has probably been one of the most challenging for investors. Keeping a level head when headlines were reporting some of the worst drops since 1987 will have taken nerves of steel.

Like any good adviser, I began contacting my clients at the start of March to reassure them not to panic; to remind them that patience was key and sticking to a long-term financial plan would pay off in the end. 

I mentioned we’d been here before and referenced the AIDS Epidemic, Ebola, Swine Flu, Bird Flu and SARS, which each caused the market to dip or pause, before the stock market eventually continued upwards. 

I repeated this simple but safe message through email communications and blog posts.

It turns out that the majority were as cool as a cucumber

In fact, understandably, they were more concerned about the health and well-being of friends and family at that point in March. It was naturally only later that some started to worry, but the majority were reassured that their plans were there for a reason and that I knew what I was doing.

This of course was music to my ears. I was pleased that they were, by and large, feeling so calm and collected (and had so much faith in me). But I would have completely understood if they’d been worried. To see your pension drop by 30% can be alarming.

I know because it happened to me

At that point in early March, despite the fact that I’m a financial adviser and was advocating the ‘keep calm and carry on’ rule, I could feel my natural instinct fighting to kick in. 

My investor's psyche wanted to overpower rational thinking. It thought that by losing 30% I might well lose another 30% if I didn’t do something to make it stop. 

But there is of course no logic that suggests that an initial drop will be followed by another, even though, under stress, the brain thinks there’s a pattern there. As the phrase goes ‘It is what it is’ and no more.

This rational and realistic approach, although tough, is the way to avoid poor decision-making. Reacting to fear – or euphoria – on the other hand, can be detrimental to your long-term financial plan. 

It’s unnatural, but something that poker players are well practiced at

Over the past few years psychologist and writer Maria Konnikova immersed herself in the world of poker to see what she could discover about human behaviour and decision making. 

She eventually became so good that she turned professional. She learnt how to identify when her emotions got in the way of good decisions – and how to learn to accept luck for what it was (and what it wasn’t). However, the main conclusion was that keeping the focus on how she played her cards and not in the outcome, helped her to keep moving until eventually her luck returned.

I think this a neat analogy to financial planning. Focusing on the plan and not outside influences – however much our instincts want to – is the mark of a successful investor. 

It’s no different to the tactics of professional sportspeople who plan every single move of the game before they even enter the court or pitch, and how they’ll react if certain situations arise. They therefore prevent the possibility that they might react spontaneously by taking the emotion out of the game completely.

Sounds difficult? It might be if you’re looking to become the next Roger Federer, but as an investor it’s made easier once you have a robust financial plan in place. One that you can come back to at any given point. Or adapt and change as the need arises.

And if you need help with that, that’s where I come in.

To talk about creating a robust financial plan to get you to where you want to be in life, book a no obligation ‘ask me anything’ chat and we can talk it through.