Fear or greed can overtake your senses in a time of economic crisis or rally. This is commonly magnified by the media’s hyper-dramatic coverage of even the most insignificant event. The best way to prevent emotional interference in your financial decisions is to avoid the hype, devise a plan and follow it.
Wear Layers
Invest your savings in the same way you would dress if you’re not sure what the weather will do: by wearing layers. In investment terms, wearing layers is the same as diversifying—investing portions of your money in different types of securities (investments). In the same way layers may not protect you from being uncomfortable, diversification may not protect your investments from loss.
However, a diversified portfolio is the most effective way to prevent value loss when the market dips. The flipside is that you may not see as much of an increase when the market recovers. It’s trade-off. You can’t have it both ways.
Cash Doesn’t Equal Safety
Fear prevents many people from investing in the market. What you may not realize is that you’re actually losing money unless your cash earns at least as much as the increased cost of living. If you store cash at home, you risk losing it to fire, flood, or theft.
You should consider holding your cash in an account that pays interest at a bank or credit union to reduce the chance of loss.
Devise a Plan and Follow It for Peace of Mind
Devise a plan and follow it. It’s fundamental to peace of mind and confidence in your ability to withstand a declining market. Preparation for your financial plan begins with understanding what your financial needs are over your lifetime. This helps to quantify how much money you need and when. Then, you’ll create an investment strategy to achieve your goals.
If you’re not confident in your ability to create a financial plan or investment strategy, you should consider seeking the services of a qualified financial professional such as a Certified Financial Planner (CFP). They’ll be able to help you prioritize what’s most important for your individual situation.
If you’d like to do research on your own, check out the resources of the Financial Planning Association.
Market Prediction Is Like Forecasting the Weather
If you tune in to your favorite media outlet, you’ll hear financial analysts prognosticate the market’s future and tell you the best way to invest your life’s savings. Change the source, and you’ll likely hear a different opinion. That’s because market prediction is similar to weather forecasting. Like meteorologists, financial professionals are trained to use diagnostic tools and history to help them determine what will happen next, but they’re often wrong.
Despite the conviction with which some may speak, there’s no way to accurately forecast the economy because of unforeseen economic killers like Hurricane Katrina, September 11th, the BP oil spill and the wars in Iraq and Afghanistan. There are simply too many unknowns.
The best way to prevent making your situation worse is to:
Remove emotion from your financial decision-making process
