For most of us money is bound up with powerful emotions such as security, confidence and all too often fear. But the emotions of investing can cause you to lose focus on important areas of your financial life, most of which have absolutely nothing to do with the share market.
Remaining patient and disciplined can be extremely difficult, especially when share markets or other assets are soaring or plummeting. The way our brains are hard-wired can cause us to make emotional decisions about our money at precisely the wrong moments.
As the chart above illustrates, it is easy to be lead by our emotions and tend towards "buying high" at the height of a market and then "selling low." During a strong bull market, investors often rush into the market because they feel "elated" and buy at the peak. Conversely, markets are sometimes prone to volatility, sharp and erratic movements, which can precipitate panic and cause investors to sell at inopportune times.
Ultimately, this kind of emotional, short term behaviour can have detrimental results, including dramatic portfolio underperformance.
Moving in and out of markets and asset classes can result in investors missing those small number of days when markets soar unexpectedly. It's therefore vital that you stick to your plan - especially during periods of market volatility.
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