Simple Ways to Help Avoid Emotional Investment Decisions

As you make investment decisions, it is best to go with your head rather than your heart. Yet this is often easier said than done. After all, your most important financial goals — college for the kids, enjoying a comfortable retirement, leaving a legacy for your family — all come with strong feelings attached. So what can you do to keep emotions out of your investment choices?

For one thing, try not to overreact to market volatility. Wide price swings in the financial markets are no longer unusual. In fact, short-term volatility may be a trend into the foreseeable future. So if you can learn to view it as a temporary consequence of participating in the economic recovery, you may be less tempted to make hasty — and possibly regretted — investment decisions.

Another way to avoid emotional investing is to stay focused on your long-term objectives. If you remind yourself what you are investing for in the first place, it may be easier to “keep your eyes on the prize” and resist the urge to react to short-term market downturns.

Watching out for some of the most common symptoms of emotional investing — such as chasing yield or a “hot stock” or feeling pressure to “cut your losses” when an investment has temporarily dropped in value — can help take greed and fear out of your investment decision making, as well.

Indeed, to help control emotions that may lead to selling an investment at the wrong time or for the wrong reason, a good strategy may be to hold it until one or more of the following occurs:

• Your goal for an investment has been achieved — in which case, congratulations, it is time to celebrate by choosing a new goal and corresponding investment.
• Your goal for an investment has changed — in which case you may need to sell and use the proceeds to purchase an investment more suitable for your new objectives.
• The investment itself has changed — in which case you might need to re-evaluate whether it still suits the goal for which it was selected.
• Your portfolio asset allocation has changed — in which case you may need to rebalance holdings to better suit your goals, risk tolerance and time horizon.
• An investment has chronically underperformed — in which case you may want to re-examine its fundamentals before exploring other investments to take its place.

One of the beneifts of working with a professional financial advisor is that he or she can help you avoid buying - or selling - at an inopportune time. By doing your best to avoid emotional investing, and by holding your investments until you really have a rational reason to sell them, you may be better able to make decisions that are appropriate for your situation. And help you use your head rather than your heart to make smart choices.

Important disclosure information about Royal Bank of Canada (RBC) and RBC Capital Markets, LLC