6 things to keep in mind before making any investment decisions
It is estimated the average adult makes more than 35,000 decisions a day.
That’s a ton of decisions. And yes, somebody actually took the time to count.
Whether that number is actually higher or lower is anybody’s guess. Suffice it to say, however, the majority of those decisions (such as blinking, breathing, turning left versus right) are most likely made without a second thought. Yet when it comes to matters that involve our money—and our heart—we tend to be a little more discerning with our decision-making, which is definitely a positive thing.
But sometimes, there is that little voice inside our heads that can hamper our ability to make good decisions. Experts have a name for this: ‘cognitive bias’.
After all, as human beings, we tend to want to take the path of least resistance (e.g., where the rewards far outweigh the risks).
This sentiment has amplified significantly in recent years, with 47% of Canadian investors having admitted to experiencing increased levels of anxiety. These increased levels of stress can dramatically affect a person’s investment decisions by decreasing their willingness to take risks—or as financial professionals call it, ‘risk aversion’. This can lead to making the wrong investment decisions or even worse, no decision at all.
If you’re looking to avoid anxiety or apathy when it comes to making your own investment decisions, here are 6 things to keep in mind:
#1: Always lead with logic versus emotion.
“Yeah, but we’re talking about my money. That’s easier said than done.”
We totally get it. The thing about the market though is that it’s volatile by nature. So much so, it’s not out of the realm of possibility for an investor to experience both a significant profit and loss in a single day. When this type of fluctuation occurs, it can be tempting to make investment decisions in haste due to the excitement of a perceived gain or the fear of a potential loss.
This is where discretion forms the better part of valour.
“In other words, take a deep breath and keep your personal risk tolerance in perspective,” says Educators Certified Financial Planner professional Darryl Martella. “5%, 10%, 15%, 20%. How much of a drop would you be comfortable with—and how much would be too much? Keeping in mind of course that markets are cyclical. They go up, they go down, they level off. It’s why you’ll often hear the term stay the course. While it may sound trite, history has shown this statement to be true. All that to say, don’t make the emotional decision to sell just because of a loss. Most markets will recover over time.”
#2: Don’t be afraid to take on more risk if you’ve got time on your side.
For example, if you’re young and in the early stages of your education career, you may want to consider taking on a more aggressive approach (i.e., greater risk). That’s because you’ll have a lot more time to recover from any market downturns. Whereas having an overly conservative portfolio could mean missing out on potential gains. At the end of the day, never take on more risk than you’re ultimately comfortable with. Reason being that the moment market waters get tough, you may panic and immediately sell—locking in your loss (which prevents you from recouping that loss once things start ticking back up).
If you’re closer to retirement or only looking for a short-term investment, stay more conservative.
While it can be tempting to take big risks when markets are at an all-time high, this approach can backfire if there happens to be a dip at the same time when the funds are needed.
#3: Keep your overall investment goals in perspective instead of following the crowd.
In addition to ups, downs, and various levels of risk, you may also feel compelled to make investment decisions based on what the masses are doing. If everyone else is buying or selling a certain stock, they must really be on to something—right?
“Investing isn’t a one-size-fits-all activity,” states Darryl.
“While some investors may share similar type goals, how they go about achieving them will differ based on individual circumstances (e.g., where you are on the pay grid, or how close you are to retirement). Plus each specific goal may require an equally specific strategy. Are you looking to build an emergency fund, which requires liquidity? Or is it more important for you to maintain purchasing power of the funds over the long term? Plus what is the time horizon for achieving each of your goals? Although it can be instinctual to want to follow the herd, it doesn’t actually mean that it’s the right call for you. Besides, being a follower tends to lead to creating investment bubbles and you know what they say about bubbles. Eventually they burst.”
#4: Keep a diversified portfolio.
As an investor, your ultimate goal, besides making money, should be to protect yourself against significant loss of that money.
While it’s not a guarantee, diversifying your portfolio (by investing in more than one asset category) at least reduces the risk of loss. That way, if one category falls, you’ll then be in a position to counteract your losses with better investment returns in another area.
#5: Consider leveraging dollar-cost averaging.
Just as a diversified portfolio minimizes your risk of significant loss, dollar-cost averaging protects you from investing your money at the wrong time. It does this by automatically buying more of an investment when the price is low and less of that same investment when the price is high.
#6: Rebalance your portfolio on a regular basis.
As we mentioned above, ups and downs are part and parcel of investing—hence the benefit of rebalancing, as it returns your portfolio back to its original asset allocation mix and level of risk.
“I recommend rebalancing every 12 months,” advises Darryl. “Because as we’ve seen recently, a lot can happen in a year. Plus it gives you an opportunity to review your overall investment goals and time horizon and make any changes if needed. It’s also a good time to ask your advisor any questions you may have, such as what the tax implications will be on your investments over time—or the pros and cons of the different account types (e.g., RRSP, Spousal RRSP, TFSA, RESP, etc.).
Need guidance making investment decisions? Reach out to Educators Financial Group.
From how your pay structure works during your working years (e.g., pay grid) to how much pension income you’ll be earning in retirement, we truly understand the financial world of education members. It’s the kind of specialized insight that enables us to help you make the kind of investment decisions that will get you one step closer to achieving your ultimate dreams and goals.
Let’s start working on your financial goals: have an Educators financial specialist contact you.