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Three ways to avoid making emotionally charged financial decisions

Jun 22, 2022 | RBC Wealth Management


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Your emotions can influence the choices you make. Learn how to better equip yourself to make emotionally well-grounded financial decisions.

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Being on an emotional roller-coaster may impact your approach to decision-making. During periods of heightened emotions, decisions tend to be based on short-term objectives, without much consideration for their long-term implications. This applies to your financial choices as well. While it may be difficult to watch the value of your portfolio decline, it may be even more difficult to recover from a series of poorly timed decisions.

Roller coaster of emotions: when the market is down to when the market is up can bring fear, excitement, neutral feelings, and exuberant feelings.

It's important to remember that remaining calm during all market environments and staying focused on the long term is critical to reaching your financial goals.

Below are a few suggestions on how to better manage your emotions, and in turn, your strategy planning and decision-making:

1. Ask big-picture questions

During times of market volatility, it may be helpful to revisit your goals to see if anything has changed. Consider asking yourself questions such as:

  • Are my goals still the same now that my investments have declined?
  • Are there near-term financial needs that can wait, or do I have other sources of liquidity to help hold me over so I can stay invested longer?
  • Is my portfolio aligned with my risk tolerance and my time horizon for when I might need the money?
  • Does my portfolio have an appropriate level of diversification?

If the answer is “yes" to these questions, then ask yourself why you need to make any changes given the risks involved in getting it wrong. If the only thing that has changed is the current value of your portfolio, should this affect your long-term plan? These bigger-picture questions can help shift the focus away from short-term discomfort. However, if the answer to any of the questions is “no," then discuss these changes with your advisor; they will review your plan and work with you to adjust as needed.

2. Avoid constantly checking your investment

Are you guilty of checking your portfolio on a daily basis? One way to reduce the emotional impact of market volatility is by simply looking at it less often and instead focusing on your big picture wealth plan. The market tends to be more volatile over shorter time periods, so the more often you check, the greater the likelihood you'll see wider fluctuations in the value of your portfolio. Checking your portfolio less frequently may mean you're more likely to see trends over the long term.

3. Speak with an advisor

Many advisors have been through multiple market cycles and have seen difficult periods before. Having an advisor who can share their expertise and experience and provide you with advice during difficult times can be extremely helpful in keeping your plan on track. 

Thinking about switching to cash?

If you are thinking about moving to cash, one thing to keep in mind is that when inflation is high, sitting on excess cash will normally result in negative real returns. Here are some questions to consider:

  • What is my plan for getting back into the markets?
  • What are the tax implications of my decision?
  • Where should I direct my savings in the meantime?
  • How long can I afford to be out of the market while ensuring my goals are still achievable?
  • How will I know when (and if) it's safe to get back into the stock market?
  • If I re-enter the market, how can I be more comfortable with volatility in the future?

History tells us that it is generally a bad decision to sell in down markets with the hope of timing your way back into the market with good results. With that said, market volatility can provide opportunities to find some bargains and even offset some gains with losses.

Dos and don'ts for controlling emotions

  • Do seek advice.
  • Do understand your goals, objectives, risk tolerance and investing timeline.
  • Do find the right information about your investments (e.g. analyst reports, financial statements, etc.).
  • Do stay focused on your customized wealth plan.
  • Don't panic and act before understanding the implications of your decisions.
  • Don't check your investments too frequently.

Keep your emotions in check

Wealth plans shouldn't be derailed by uncertainty and periods of volatility. Reacting emotionally often complicates the process, and the more you try to time your decisions according to the markets, the worse off you may be.

Even though wealth planning is driven by facts and numbers, it's also important to take into account your feelings and beliefs about money. Nearly everything we do requires it in some shape or form—and yet money is intensely personal. People dedicate so much of their lives to earning it, and humans are emotional beings by nature.

As you grow your wealth, it's important to work with an advisor who can share their experience and insight to help you make well-grounded financial decisions.

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Wealth planning