Smart investing: Tips for keeping a cool head
Countering human nature to achieve financial goals
Instinct often causes people to make financial decisions emotionally—not logically. Countering emotions is challenging, but it's possible.
Here are a few ways human nature can get in the way of your financial goals—and how to overcome them:
The problem: We're tempted by the near term.
Like quitting smoking or sticking to a diet, saving for retirement requires placing long-term benefits ahead of near-term gains. You know that saving for retirement is a rational decision, but it may be hard to put a value on benefits you won't enjoy for a long time.
How to solve it: Try to boost your salary deferral contributions to your individual retirement account (IRA) or employer’s retirement plan (401(k) or 403(b)) each year. Even better, choose an automatic deferral increase option, if your employer offers it.
Also, avoid impulse purchases. Have the discipline to walk away for a day and ask, “Do I really need that?”
The problem: Losses hurt.
It’s normal to worry more about your losses than enjoy your gains. But this tendency may lead you to accept lower return potential, in order to avoid the sting of a loss.
How to solve it: If you invest in more than one investment option, set up a rebalancing plan and stick to it. Review your investment elections periodically to make necessary adjustments, but not so often that you get caught up in every little market flutter.
The problem: Having too many choices can be counterproductive.
When faced with a large volume of investment options to choose from, you may find yourself in the grip of “decision paralysis.” Some people may cope by opting for “safer,” lower-risk investments—but these investments often have lower potential returns as well.
How to solve it: Select the appropriate investment mix for you and adapt your asset allocation plan based on your needs.
The problem: We chase past success.
Active investors may tend to buy more after periods of strong performance, but short-term gains don’t always translate to long-term returns.
How to solve it: Try not to obsess about short-term market moves. It's a good idea to keep your eye focused on your ultimate retirement date, not the daily headlines.
By keeping a cool head—and maintaining perspective with your investment decisions—your financial strategy will stay on track over the long-term, and you’ll be more likely to reap the greatest benefits.
Investing involves risk, including possible loss of principal.
Asset allocation and diversification do not ensure a profit or protect against a loss.
Steward Sneed Hewes, and BancorpSouth Insurance Services are not an affiliate of any company of the Principal Financial Group®.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
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