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Avoid Emotional Investing

The title of this post should have been “Don’t Panic Over Your Investments” as I wanted this to be a public service announcement should the market start reversing its direction and drop. But I thought I would explain investing and diversification some more to help physician investors be better prepared.

In the past 30 days my securities investments have gone up by +$30,000 even though I haven’t added a penny to my portfolio.

These past few years mark my very first bull market. I have to yet experience a market crash while fully invested.

Personal Capital

It’s wonderful to enjoy the profits of a bull market which is why I started investing in the first place. But it’s more important to avoid panicking when the market starts dropping.

We can avoid emotional investing by understanding how the markets work and having a firm grip on our investment strategy.

 

Market Panic

I don’t watch the news and haven’t now for nearly 5 years – I’m still alive and nobody has called me an idiot, at least not for reasons of being uninformed about the latest child kidnapping or sex trafficking ring right next door.

I don’t watch the news because I am easily manipulated and can panic as easily as the next person when it comes to emotionally delivered information.

Since late 1990’s I have watched CNBC, read WSJ, and digested other financial news sources. None of these have provided with me real insight. They only fed the stereotype of emotional investing which I’m desperately trying to avoid.

Markets Have To Go Up

The securities markets, made up mostly of stocks and bonds, fluctuate up and down for reasons way beyond my understanding and after having read the most brilliant commentaries it’s clear to me that the workings of financial markets are also completely beyond the comprehension of these experts.

Much like the annual flu epidemic, I can rely on the stock market to have some gains, every single year.

I know for sure that there will be a flu epidemic next year and the year following that. The CDC can make all sorts of idiotic guesses as to how well the latest/greatest vaccine will control the current epidemic but because the CDC doesn’t understand all the factors, it will only be correct some of the time – the rest of the time it’s just hype.

Should manufacturers stop producing flu vaccines because they have been fairly useless that past few years? Of course not.

Should Genentech get out of the Tamiflu game? No again. These companies know that some years will be low-profit years but that most years they will make large profits.

The lull or drop in the securities markets allows for new growth. Some companies will go under while others will sell out and shift their C-level employees and come out even stronger.

In the end, the securities market needs to go down in order for me, the average investor, to enjoy long-term profits.

Emotional Investing

Avoid emotional investing by understanding that the markets will drop regardless of how they are now and that the drops will help you in the long-run, depending on your particular investment strategy.

Furthermore, understand that no matter how low they go, they will come back up. Is that guaranteed, no, nothing in the economy is. But as long as an economy exists you can expect some profits from the securities markets.

 

Your Investment Strategy

Your investment strategy is unique to you. Investing in real estate, in your own business, or index funds isn’t an investment strategy – that’s just choosing your players.

There are so many other aspects which you need to figure out and I don’t see how that’s possible unless you have a financial adviser with whom you chat every few months.

During such conversations important topics come up and you ask the right questions and get answers which you didn’t even know you needed. This prevents you from panicking should your investments behave in a manner you never expected.

Other personal finance enthusiasts such as the beloved Godfather and in fact many other physician bloggers don’t believe you need one. Maybe they’ve been burnt by previous adviser like all of us have or maybe they stand to profit from you not having your own financial advisor.

Regardless of their motivation, I hope you decide for yourself if you need a financial adviser and then go through the right process to find the right financial adviser.

Income Diversification

When you diversify your income sources then you are less reliant on your job and you can capitalize on the company which will pay you the most any given month or year.

By diversifying my income streams I have been able to work for medical groups which pay me more when I see more patients. This is just one of the many ways to diversify your income.

Though income diversification I have taken my hourly wage up from $100 to $250.

Asset Allocation

We can diversify our income but we can also diversify our investments.

When you diversify your investments then you come up with an asset allocation which helps you decide how much of each particular investment you hold to make up your net worth.

I discuss this with Andrew, my financial adviser, every time we chat. We address shifts in asset allocation which is inevitable when the market moves and decide whether I need to rebalance my portfolio or leave them be.

Your investment strategy involves selecting the right investments which have a low correlation to each other. For example, if I invest in bonds then they are less likely to move in the same direction as stocks during a major economic shift. That’s how I diversify my portfolio.

I then manage my asset allocation by rebalancing when my stock index funds surge as they have in the past few months. In practice that would mean that any new money that I were to invest in the securities market would go towards my bonds. I may even need to sell some of my equities (stocks) in order to buy more bonds to maintain my desired asset allocation.

Your Risk Tolerance

Coming up with your unique risk tolerance is critical to prevent you from panicking. Your risk tolerance is one of the most important factors to become aware of to help you avoid emotional investing – which often involves selling off your investments after they have dropped significantly in value.

If you are in mostly volatile individual stocks or volatile stock index funds then you may not have the stomach to make it through another 2001 tech bubble or 2008 stock crash.

Your risk tolerance should determine your asset allocation and your risk tolerance should change as you get older or as your circumstances change. Would it make sense for you to be invested in mostly stocks if you are 80 years old and unable to work for an income?

Or would it make sense for you to be 35 years old and invested mostly in bond index funds? Conservative investing is one of the main reasons women end up with less money in their retirement accounts.

Your War Planning

War planning means that you play out various scenarios on paper in order to figure out how they will change your lifestyle and  your emotions.

Next, you come up with a plan to address such war scenarios and this will help you avoid emotional investing. You won’t panic, you won’t sell out your investments at an unnecessary loss, and you can maintain your long-term position – if that’s what your particular investment strategy dictates.

I have played various scenarios in my head and in my journal. My current net worth of $850,000 could drop down to $700,000 or $600,000 or $450,000 and my lifestyle wouldn’t be affected in any measurable manner.

 

5 Ways To Avoid Emotional Investing

Avoid emotional investing because it will deplete your energy and because your money isn’t a toy. Your money is meant to buy you freedom and replace your working hours with more free time.

You aren’t after 20% annual returns because you already have a very high income. You want to protect your savings, grow them in the long-term, and create a steady passive income for when you are no longer able to earn an income.

1. Ignore The Hype

As I mentioned, avoid watching the news when it comes to your investing. By news I am referring to mainstream news. Feel free to lurk on forums and of course talk to your financial adviser until her ears fall off.

If the market is doing really well then everyone will say that it’s about to crash. If it’s doing really poorly then it’s the end of the world. None of this will be helpful to you because hopefully you are investing for the long-term.

2. Ignore The Negative News

The negative news are often focused on jobs reports, foreign economy effects, inflation, imminent wars, and major business disruptions such as a sector crash.

Avoid such information because even during the Gulf War savvy investors were making their dividend income from their investments.

Even during massive inflations we had in the 1980’s people were pulling money out of their 8% CD’s to pay for their retirement lifestyle.

3. Don’t Buy Hot Funds

Thinking back every year there has been some hot fund or sector which has been hyped by mainstream news.

Whether it’s peer-to-peer lending or crowdfunded real estate investments or digital currency, these are hypes. I didn’t say that they aren’t lucrative, but they are hypes.

Does your investment strategy tell you how to deal with such investment options? Will you know when to sell, when to hold, and when to buy more of a particular hot fund?

Hot funds are hot because they are going up in value and because advertisers pay fat dollars to get these products in the news. I remember in 2001 everyone was making money on stocks and every radiologist and anesthesiologist I knew was daytrading.

They aren’t daytrading anymore.

5. Thing Long-term

The long-term investor invests whether the economy is down or up. They will lock in profits either in the short-term or long-term by staying in the market.

Selling in and out of markets is costly no matter if you are invested in real estate or index funds. It’s best to have a long-term strategy until you become such an expert that you don’t need anyone telling you when to buy/sell.

6. Talk To Your Financial Adviser

I believe every doctor should have a lawyer whom they can call up in emergencies, a great mechanic, a fantastic dentist, a superb physician, and a financial adviser.

With the right expert in your pocket it’s rare for you to make bad decisions. Should you make a terrible decision anyways then you’ll have someone who can help you recover with the least damage to your situation.

If you get an uneasy feeling about you investments or your net worth then drop an email to your financial adviser. If they can’t explain things to you or help you through your emotional ups and downs then it’s either because they aren’t adequately competent or you are neurotic.

It’s important to have the right financial adviser who can work well with you and who can digest the news and address what’s relevant to you, especially if you can’t help avoiding news.

 

Read more about dealing with a market crisis.

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