Emotions and Investing: Managing Your Portfolio Amid the Chaos

Even the most acclaimed Hollywood writers couldn’t have imagined all the drama investors are dealing with today. Whether it’s historic market selloffs, U.S. election turmoil, nations at war, a global IT outage, it feels like a decade’s worth of news has happened in just the past few weeks.

With all that’s going on, you may be feeling at least a little overwhelmed. Instead of letting your head spin, it’s important to focus on your goals and filter out the noise.

Of course, that’s often easier said than done. We’ve experienced record stock tumbles recently, “people get really emotional about money,” says Michael Sherman, head of behavioural science at RBC. “Investing usually involves discipline, patience and sticking to a plan, but humans have evolved so that when we face perceived danger, we’re going to have knee-jerk reactions.”

Sherman, who has counselled investors, advisors and others on how to not get caught up in the chaos shares some insights into how to stay focused on investing and managing your portfolio when those knee-jerk reactions happen.

Stay humble

In times like these, a lot of people start running scenarios in their minds – or out loud around the water cooler with colleagues – about what might happen if world events turn out one way or another, Sherman says. He says that investors also tend to become overly optimistic about how they think things will unfold and make trades accordingly. While it’s one thing to get a little tactical with a portfolio, it’s another to feel overconfident about how much you know and how good you may be at predicting the future.

“As humans, we tend to think a lot of ourselves, and that can be dangerous,” says Sherman. “It’s innately human for us to believe that we can understand how the market works, even if we don’t have a lot of information. There’s rarely a perfect time to execute a trade. But we fool ourselves to think we have the ability to predict what’s happening.”

Focus on what matters most

Humans may also have trouble making decisions and when faced with a barrage of information, and so when it comes to your portfolio, it’s integral to only focus on what matters most to your investment process.

“Learning or seeking information can be a good thing, but you need to know how to filter information that is important,” says Sherman.

Part of the challenge with our ability to take in information relates to recency bias, which is when you put more weight on the importance of something that’s just happened or an issue that’s at the top of your mind. For instance, it may seem as though a wild week in U.S. politics should be a major deal for the markets, but it’s important to remember that more fundamental factors, such as earnings growth, often drive share prices.

Don’t dwell on a bad day

Loss aversion is one of the most overheard behavioural science terms, and it applies here, too. Sherman says investors tend to feel losses two times as much as gains. In other words, if you lost a $20 bill, you’d feel two units of negative feelings, that could be sadness, disappointment, or guilt. If you found $20 on the street, you’d gain one unit of positive feelings, which could be happiness, elation, or excitement. “No one wants to lose, so our emotions kick in when we get close to losing something, such as when our investments go underwater,” he says.

While stock markets have moved higher this year, save for the usual market volatility, the trouble with loss aversion is that it’s hard to know when it might strike. If equity prices fall after a big day of negative headlines, those losses could cause you to feel it intensely, even if it’s just regular market ups and downs.

“People tend to act in irrational ways to avoid losses,” says Sherman. “So the big issue about noise is you’re constantly on alert to find out what’s happening, but you’re never going to truly understand all the variables that affect the market.”

Stay focused

Fortunately, humans can still be mindful even when they are inundated with feelings and emotions. The first step is to create an investment plan if you don’t have one already, advises Sherman. That includes setting guidelines for how you invest. For instance, if there are specific metrics you follow to tell you whether a stock is a buy or a sell, when you may need to reevaluate the plan based on risk, age or life events, and let those points determine your actions, not your emotions.

Some investors develop an investment philosophy over time – they may consider themselves value investors who prefer owning inexpensive companies or growth investors who want to hold stocks that could see a significant earnings expansion. Others may have a preferred asset allocation approach, such as putting a particular percentage of their money in certain geographic areas. There are times when you may need to reevaluate based on age, risk or life events, but you may not want to deviate just because you are feeling overwhelmed.  

“Consider your long-term objectives and maintain perspective,” says Sherman, “rather than reacting to your emotions and noise.”