Tahoe-Truckee Market Beat: Don’t let emotions impact investment decisions
Hockey great Wayne Gretzky once said, “you miss 100% of the shots you don’t take.” What he meant was that if you don’t take the risk, there can be no reward. Investing can be risky, but so can failing to invest.
Many investors make emotional decisions based on fear and greed. They have tendency to panic sell when prices are at the bottom and buy when they’re near a top.
Quite a few young people today, in the millennial generation, have developed a fear of investing in the stock market. They saw what happened to stock prices after the housing bubble burst and are reluctant to invest today. Most people do have a loss aversion, which means that they do not like losing money and would rather avoid a loss than enjoy a gain.
By choosing not to invest in the stock market, younger people are risking losing purchasing power over time. If you put all your money under the mattress or in a bank savings account, you won’t actually lose money, but if there is inflation, your dollars will buy less and less as time goes on.
When saving for long term goals like retirement, it’s very important to make some investments that can keep up with and even outpace the inflation rate.
Currently the Federal Reserve is targeting an inflation rate of 2% per year. If the Fed achieves that target rate and inflation does run at 2% annually for a few years, any funds earning less than 2% will lose purchasing power.
You’ll have to get a return of at least 2% on your investments just to stay even with inflation. By investing too conservatively, you’ll lose money.
If the fear of losing money is keeping you from investing in the stock market, your dollars are exposed to long term inflation risk.
One of the best ways to overcome fear is to educate yourself and develop realistic expectations for your investments. You can reduce fear and financial stress by having a sound plan in place and sticking to it.
Having a plan and realistic goals is a critical step toward achieving long term financial success. Young people should get started investing as early as they can and educate themselves about their investments.
The market will go through cycles of volatility, and you have to be careful to not let emotions drive your investment decisions.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.