An emoji guide to investing

Warren Buffett once said that “while reasonable intelligence is essential to be a successful investor, temperament is key.”

The essence of the words from one of the most successful investors ever is, if you cannot control your emotions, you cannot control your money.

If you've been investing for any length of time, you've probably experienced it; the uneasy feeling that comes when markets fall sharply, headline news predicting doom and gloom, and your portfolio suddenly looking different from what it did a few weeks previous.

The temptation to act on this in the face of volatility and uncertainty is one that we are all susceptible to. What we know is that the average investor, acting on these emotions, does not tend to get the returns they are deserving for being invested. So, what can we do to put ourselves above the ‘average investor’?

Staying calm through the ups and downs

Humans have a natural tendency to focus on the short-term, which can lead to making decisions that are counterproductive to our long-term goals. This fixation is exacerbated when such short-term events are extreme or negative in nature such as a global pandemic, a war, an energy crisis, record levels of inflation.

It’s only natural to feel worried, nervous, or scared about their money during times like these. When we start to feel these strong negative emotions, our fight or flight instinct is to take immediate action to feel some sense of comfort again. The temptation for many may be to sell investments at or near the bottom of the market for fear of further losses, seeking refuge in a lower level of investment risk or cash. However, your investments can be likened to a bar of soap – the more you touch them, the smaller they get.

A common occurrence is for the average investor is then to reinvest once ‘normality’ resumes, and markets are buoyant again. However, by this point the investor has missed the bounce back and foregone often substantial gains.

Historically, volatility shocks have preceded some of the best runs of market performance on record and the risk of missing out on the initial recovery can have a huge impact on the long-term outlook of a client’s investments. By remaining disciplined and not allowing emotions to drive actions, you give yourself the best opportunity for investments to recover and drive long term growth.

Taking a long-term view

The long-term journey of an investor may be one of ups and downs within your portfolio, but emotionally, this should be steady and calm.

Given the numerous world and market events in recent times, there’s an argument that this volatility is now in fact ‘normality’’. Award-winning investment psychologist Morgan Housel said that “An underpinning of psychology is that people are poor forecasters of their future selves.” This is especially true when they are in a stressful situation. If this is now market normality, it highlights the importance of keeping a long-term perspective, remaining calm in the face of uncertainty and giving your investments the best chance for future growth.

How can we help?

Carbon’s role is to provide long-term perspective to keep our clients on track and ensure that unlike the ‘average investor’, your long-term investment returns are not diminished because of emotions.

We provide you with ongoing investment coaching, so you understand why markets behave the way they do and feel more comfortable throughout future market drops. Historically we have seen a market crash every seven years on average, so it is more than likely we will see more throughout our investment journeys.

We also build robust financial plans and continually review these with our clients. By having a clear plan, you are much more likely to stick to it. One bad year of investment returns should not materially impact a longer-term plan.

Using a cost-effective and evidence-based investment solution stacks the odds in our clients’ favour. Accepting that it is impossible to tell which companies will do well and when, you are much more likely to be a successful investor by holding a globally diversified portfolio for as long a period as possible.

Should you wish to discuss any of this article in further detail, please do not hesitate to reach out or speak to your usual planner at Carbon.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.