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  • Psychology of investing

    Psychology of investing

    From February to March of 2020, the S&P 500 declined about 34%.

    Yesterday, the S&P 500 hit an all-time high.

    From March 2020 to January 2024, the S&P 500 grew by 110%, from 2,584 to 4,780. 

    S&P 500 graph

    Where am I going with this?

    An article came out in 2020 that said that “42% of Investors Sold Stock at Start of Pandemic — And Nearly All Regret Doing So”. 

    Imagine if they just held on to it. They would have been able to potentially double their portfolio’s value. 

    So why do people sell during these tough times? How can we be ready for when the stock market does actually drop to continue on?

    It ultimately comes down to one main concept: 

    Emotions.

    Your emotions can intrude even on the soundest of plans. How would you react to your portfolio dropping 20% in just one week, going from $100,000 to $80,000 almost overnight?

    It’s important that we control our emotions through these investment decisions:

    1. Diversification among different sectors

    The first step to controlling our risk and ensuring we stay invested during down times is by diversifying the assets we buy.

    It’s almost impossible to predict which stocks will perform well and which stocks will sell off significantly, or their industries. Buying diversified ETFs that cover the entire market reduces your risk.

    For me, 100% of my stock market investments is in just 2 ETFs: VTI and VGT.

    2. Allocation of your investments/equity exposure

    The proper equity exposure depends on the magnitude of your accumulated assets, your financial liabilities, your investment goals, your tolerance for risk, your need for income, and your age.

    Going 100% equity will have a much bigger downside during tough times than going 70% equity and 30% bonds.

    If you are a younger investor, 100% equity makes sense.

    Gold also tends to perform well during stock market slowdowns.

    3. Set up automatic investing and delete your app

    Tricking our psychology is the best way to actually continue investing and not panic sell during tough times.

    Many investing apps allow you to set up automatic investing within the app. Then, delete the app.

    Fidelity analyzed thousands of client accounts trying to figure out what the top performers had in common. The result: the best investors were either dead or had forgotten they had an account.

    As a final note, I will just leave you with this chart:

    S&P graph long term

    Actionable tip: review your equity allocation and analyze your portfolio. 

    See you next Saturday.

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