It’s no secret that today’s markets are uncertain.
Between recent triple-digit drops to the Dow Jones Industrial Average and renewed fears of a looming recession, this year’s record run-up on stocks has been put on pause.
Whether that’s just a blip or signs of a prolonged downturn is to be determined.
In times like these, investors are susceptible to getting swept up by their emotions.
Dan Ariely, chief behavioral economist at personal finance app Qapital and professor of behavioral economics at Duke University, said that there are ways to avoid getting caught up — and making investment moves you could regret later.
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Resist the urge to check your portfolio
Watching the stock market can be a roller coaster of emotions.
“What happens on the day that it goes up?” Ariely said. “You feel happy.
“On the day it goes down, you feel extra miserable.”
But the best action to take in this market may sound counterintuitive: Don’t look at your portfolio.
Ariely recalled how during the financial crisis, he found himself caught up in checking his accounts more frequently.
“I wasn’t going to sell,” he said. “I wasn’t going to buy; I was just kind of looking obsessively.”
One Friday morning, he noticed he was consumed with checking his investments. And that put him in a bad mood.
Dan Ariely, behavioral economist and psychologist.
Photo: Mary R.
To change that, he locked himself out of his accounts, and then enjoyed the weekend with his wife.
“If we’re going to look at it going up and down, we’re just going to be more miserable,” Ariely said. “We’re not only going to be more miserable, but act on it.”
Those panicked decisions based on emotions often lead to regrets later, he said.
Of course, there are times when you have to log in. The key is to be intentional when you do.
“Decide what change you want to make, and only then open your portfolio,” Ariely said. “It’s never a good idea to open up your portfolio for fun and then decide what to do.”
Use caution when making decisions about the future
The decisions you make about the stock market are always decisions about the future, Ariely said.
Inevitably, many investors decide how to invest based on what happened in the past.
“It’s water under the bridge,” Ariely said. “It’s gone. It’s over.”
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And when past performance clouds your decisions, it also adds and emotional burden to your approach.
Instead, Ariely suggests, try to starting with a clean piece of paper or spreadsheet. Imagine all your assets are in cash, and then decide how you would invest that money today.
“It’s the right way to say, ‘What do we want and let’s implement it,’ rather than seeing what we have already,” Ariely said.
“That’s the right way to invest.”