Be Brave, and Go Bargain Shopping

I had no idea how useful my psychology degree would be when I began working in finance. The study of behavioural finance has a growing audience as more and more economists, advisors, and investors realize that despite best intentions, emotions impact financial decision making, often in a detrimental manner. Most savvy investors accept that markets are efficient and that having a well-diversified strategy is a key to long-term success; those concepts are straightforward. However, sticking to one’s strategy in the face of plummeting stock prices and negative portfolio performance requires resilience and discipline.

It is tempting to consider dialling down risk or holding off on deploying surplus cash. After all, markets could fall further and you could be in a worse position six months or even a year down the road. That’s true, but unless you have a very short time horizon, such short-term volatility should not be a cause for concern. In fact, it is completely normal and expected. When market corrections occur, remind yourself that stocks are “on sale” and there are bargains to be had. By ignoring your emotional propensity to cash in and shove your money under the mattress, you can significantly improve your long-term performance potential. By buying into the market as it approaches a trough, you are helping to lower your average cost and giving yourself significantly more upside potential than if you wait until recovery is underway. But be wary of trying to time the bottom; market timing doesn’t work, and it will just leave you frustrated and anxious.

There will always be a new crisis, but it will not be the undoing of the global economy. We have survived the Great Depression, world wars, oil embargoes, terrorism and bubbles too numerous to count. Markets react quickly, and in the long run, you are far better off participating than sitting on the sidelines. Your portfolio strategy is your blueprint for success. Stick to it to give yourself the best chance for long-term positive performance. Block out the “noise” from the media (remember, they get paid to sell stories not provide financial advice). Rebalance and be patient. This, too, shall pass.

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