Years ago, when I bought one of my first stocks, its share price dropped several days later. As a newbie investor, I got spooked, so I unloaded those shares in an attempt to minimize my losses. A few days later, they were back up to the price I'd bought them at. A day or so after that, they rose even higher.
It's easy to laugh at my rash decision and glaring mistake now. Thankfully, I didn't lock in a particularly large loss at the time by selling hastily. But it did teach me a very important lesson: to not let panic or other emotions get in the way of my investing decisions.
In fact, giving in to emotions is one of the leading ways you can lose money in the stock market. If you've been a victim of emotion-driven investing before, here are some strategies to employ.
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1. Take a buy-and-hold approach
When you think of investing in the stock market as a long-term game, you'll be less likely to get thrown by individual events along the way. The stock market has a strong history of recovering from losses. If you take a buy-and-hold approach -- load up on quality stocks now and hang onto them for decades -- you're less likely to get burned. You're also less likely to give in to panic every time your portfolio value dips.
2. Use dollar-cost averaging to your advantage
Many people worry about losing money on stocks and therefore hesitate to buy at certain times, like when stock values are up or when there's a recession at play. That's why a better bet is to commit to buying stocks at regular intervals, regardless of the circumstances at hand.
It's a strategy known as dollar-cost averaging, and it helps investors avoid falling down the counterproductive rabbit hole of attempting to time the market. With dollar-cost averaging, you might say you'll put $100 into the stock market every week. You might even get more specific and say you'll buy $100 worth of a particular stock. Dollar-cost averaging has been shown to help investors pay a lower average share price than timed purchases, and it's a simple way to take emotions out of the equation. You can set up your brokerage account to follow a dollar-cost averaging strategy, or sign up for your employer's 401(k) plan and have funds deducted regularly from your paychecks.
3. Diversify
Having a wide range of investments can buy you peace of mind during periods of stock market volatility and make it less likely that you'll act irrationally. You can diversify by buying stocks from different segments of the market or by loading up on index funds. With index funds, your portfolio won't outperform the broader market, but you will benefit from general market upswings. Index funds also let you diversify in an instant, so you don't have to put in the time to research individual stocks or fret that you've chosen the wrong ones.
Most of us can't just flip a switch and turn our emotions off, but there are steps you can take to be a less emotional investor. That could, in turn, spare you a world of losses in the course of your lifetime.
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January 24, 2021 at 09:04PM
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