This article was published in the New Haven Register on December 23, 2017.
The stock market has been on a tear over the past year, hitting record highs on a regular basis. It’s a good time to reflect on the importance of maintaining a cool head when making investment decisions and other financial moves.
Too many people invest in the market at the crest of an upward trend and then sell when it nears the bottom of a downward trend. The culprits are hope and fear, and the consequences are financial loss, since these investing habits are the exact opposite of the time-honored advice to “buy low and sell high.”
On the other hand, disciplined investors who don’t let emotions interfere with financial decisions are more likely to enjoy steady gains – over the long term. Here are some strategies for avoiding emotional traps and staying on course, not to mention sleeping better at night:
- Make a Plan. The heart of effective financial planning is to create a written financial plan that lays out a detailed strategy based on your individual goals. Your plan should cover all the financial aspects of your life including retirement planning and tax planning. It should include a written investment policy that spells out the types of investments you will utilize and the returns that each investment class has experienced over different periods of time.
- Follow Your Plan. Do not make decisions based on media reports or the ideas of family or friends. Rising markets crash, falling markets rally, and inert markets can surprise either way. Remain true to your financial plan and resist the urge to make changes based on market trends or economic upheavals. Your plan, especially if a professional financial planner produces it, will take such things into account.
- Diversify and Rebalance. The 2008 economic crash was a rare exception to the general rule that asset classes tend to move in differing directions. Diversifying your portfolio by investing in stocks, bonds and alternative investments such as real estate can lessen portfolio volatility over time, since one class normally will head upward while another class stagnates or drops in value. Also, you should periodically rebalance your portfolio to maintain your diversification picture, since the values of your asset classes will rise and fall over time, inflating the percentage of some classes and deflating the percentage of others within your portfolio. That being said, keep taxes in mind when rebalancing taxable accounts.
- Hire an Expert. For the ultimate in peace of mind, work with a Certified Financial Planner. An experienced financial adviser provides you with someone to discuss your hopes and fears with, and someone who will watch out for signs you are letting your emotions take control. A financial planner will not only help you craft a solid financial plan, he or she will also help you stick to your plan over the long term, and to make changes when and if they are warranted by logic, not emotion.
Eric Tashlein is a Certified Financial Planner professional and founding Principal of Connecticut Capital Management Group LLC, 67 Cherry St., C-2, in Milford. He can be reached at 203-877-1520 or through www.connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Registered Representative, Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors Inc., A Registered Investment Advisor. Cambridge Investment Research Inc., and Connecticut Capital Management Group LLC are not affiliated.