Understanding the emotions of investing

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No one can control the stock market or exactly how an investment will perform. And that lack of control can lead to making poor (and many times, emotional) investing decisions – like chasing performance, not diversifying, or moving into and out of the market (often at the wrong time).

While these reactions can be triggered by a desire to avoid risks, the results of these behaviours can pose the greatest risk of all -- not reaching your long-term goals. In fact, the biggest risk may not be market fluctuations themselves, but our reaction to these fluctuations. That's why it's so important to have an Edward Jones financial advisor in your corner, helping you stay committed to your investment strategy.

Here are some common emotional investing behaviours that may derail your journey to reaching your long-term goals. By understanding the pitfalls of these behaviours, you can avoid them.

Market cycle of emotions

Source: Edward Jones

Description for chart showing market cycle of emotions

Stock market returns have historically followed a cycle of emotions starting with strong returns when there is optimism and peaking when there is Euphoria. When fear starts to set in, market returns turn negative and eventually bottom out when investors are fearful. This cycle repeat itself as optimism starts to take over again.

History teaches us

Based on what the market’s been through during the past few years, we understand that you may have been hesitant or even anxious to regularly invest your hard-earned dollars. But history teaches us the importance of staying invested in good times and bad – and, if appropriate, adding good investments to the portfolio when prices are down.

Historically, when consumer confidence was low, stock prices were also low, and future returns ultimately trended higher. On average, stocks returned nearly 15% per year following a consumer confidence reading of below 66. When consumer confidence was higher, stock prices were higher, and future returns tended to be up only 6% between 66 and 112, and just under 3% when over 113.

Keep emotions out of investing

Sources: Ned Davis Research, Inc., The Conference Board, Bloomberg and Edward Jones calculations, 2/28/1969-12/31/2019. Past performance is not a guarantee of future results. Copyright © 2019 Ned Davis Research, Inc. All rights reserved. Further distribution prohibited without prior permission.

The S&P 500 is an unmanaged index and is not meant to depict an actual investment. Figures do not include fees, commissions or expenses, which would have a negative impact on investment results. Consumer confidence – A survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future.

Conference Board – A not-for-profit research organization for businesses that distributes information about management and the marketplace. It is a widely quoted private source of business intelligence.

Description for chart showing market cycle of emotions

The Toronto Stock Exchange (TSX) index has historically earned higher returns when the Consumer Confidence level is low, posting an annualized average return of 14.7% when the index is 66 or lower and only a 2.8% when the index is above 113.

How we can help

So when you feel your emotions beginning to get the better of you, take a "timeout" and work with your Edward Jones financial advisor to review your goals before making what could be an emotional investing decision. Your portfolio and your future self will thank you.