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Here is a statement that is bound to cause you to raise your eyebrows: Your long-term financial success may depend less on the structure of your portfolio than on your ability to adapt your behavior to changing economic times.
At the foundation of your financial well-being is your behavior. One could argue that the determinants of long-term, real-life, investment returns are not market behavior, but investment behavior.
Look at it this way: most of us would agree that, while carefully constructed investment portfolios can probably weather almost any economic storm, none can withstand the fatal blow of an owner who panics and sells out.
This panic behavior is so common that an entire field — behavioral finance — studies how and why investors like you might make irrational money moves.
Who Can You Turn To For Help?
An increasing number of financial advisors realize that their primary business isn't just helping develop your financial plan or furnishing you with investment advice, but caring for and transforming your emotional well-being.
In many respects, financial advisors are the antidote to investors' panic. In theory, all financial advisors will try everything to keep a client from turning a temporary decline into a permanent loss.
But the tendency to sell low and buy high will not stop anytime soon — and it's in all of us.
Supporting your financial and emotional well-being often requires that both you and a financial advisor learn from each other and work together over the long term. You both also must realize that antidotes to panic sometimes require more than one dose.
Curing Irrational Investing Behavior
When managing personal finances and investments, people frequently exhibit irrational behavior for different reasons. If you're one of these folks, be fair to yourself.
Everyone makes choices about money nearly every day — how to earn, spend, save, invest and so on. Sometimes you pick wisely, sometimes harmfully. Some decisions, particularly those regarding when and where to invest, teeter from wise to harmful and back, depending on when you reached your conclusion and when you took the plunge.
Supposedly, if you can learn more about the cause and effect of your money decisions, and what around you contributes to them, you can improve your financial confidence. Pinpointing behaviors as either rational or irrational in the middle of the storm comes hard, though.
Consider Your Risk Tolerance
Sometimes irrational behavior produces good outcomes. But more often than not, well-trained (and often self-proclaimed) experts, applying rational processes to money management, wind up on the wrong side of the intended outcome, especially in the short term. This helps make investing fascinating and, at times, maddening.
Because investment markets are complex and potentially both irrational and efficient, understand your risk tolerance. Define what risk means in terms of your financial confidence, and your willpower to handle markets when fear and greed influence decisions.
What Is Your Investment Strategy?
A written investment strategy can serve as a foundation for your long-term decisions. Your strategy — and your commitment — may also benefit from testing your strategy's performance hypothetically in past crises.
Since we can't predict outcomes that depend partially on luck, we plan according to probabilities. For example, rather than focus on the size of your expected returns, know the probability that your investment strategy can support your desired spending rate in retirement or make tuition payments, fund a wedding, cover health care costs and so on. Your broader financial plan drives your investment strategy, not the other way around.
Ideally, when your goals link directly to your plan, you have a better foundation for dealing with investment uncertainty and Wall Street's effect on your emotions and decisions.
Talk to a Financial Advisor
Financial advisors with BECU Investment Services are here to help. Our team will take the time to get to know you, understand your goals and plan and implement a financial and investment strategy that's appropriate for you. Set up a complimentary consultation or call 206-439-5720.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
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