NEW YORK, NY – FEBRUARY 09: Traders work on the floor of the New York Stock Exchange (NYSE) Friday morning on February 9, 2018 in New York City. Following a drop in the Dow Jones Industrial Average of over 1,000 points yesterday, stocks opened higher on Friday with the Dow up over 300 points moments after the Opening Bell. (Photo by Spencer Platt/Getty Images)
Conventional wisdom tells us that people behave rationally, yet most people make emotional, not rational, decisions (especially with their money). We all know, markets go up, down, and sideways. When markets go up, people feel good. When they move sideways (or, what I call, chop-city), most people lose patience and get frustrated. Finally, when markets go down, fear takes over and most people tend to panic and sell right before the market turns higher. That is just human nature. Here are three ways you can behave rationally when it comes to your money:
1. Have A Plan
The first thing people should do is to have a plan for when they are going to enter, when they are going to exit, and how much they are going to risk, if the market moves against them. This way you are in full control and already know what you are going to do at all times. This process allows you to be prepared for any one of the three scenarios that may unfold: up, down, or sideways.
2. Manage Your Risk
The second thing people should do is manage their risk. If you look back at any bear market and study the big firms that failed on Wall Street, the one common denominator is that they all didn’t respect risk. Conversely, the ones that thrive, do so by effectively managing risk. History shows us that one key to long-term success on Wall Street is to always respect risk.
The final point that helps people behave rationally is to be accountable. In today’s world, it is easier to buy and sell stocks than any other time in history. That has led many people, especially individuals, to make unilateral decisions and not hold themselves accountable to others. A good way to overcome this hurdle is to work with an objective third party (a trusted financial advisor, planner, or financial consultant), to make sure you are making rational, not emotional, decisions.
People Are There To Help You:
The best part about today’s world is that you can easily find trustworthy, seasoned, professionals who are available to help you make rational decisions with your portfolio. Earlier this week, I spoke to Petar Arizanov, CFP, Senior Director – Investments at Oppenheimer & Co. Inc on Park Avenue in NYC and he told me, “Investors should check their emotions and carefully review their overall plan, cash flow needs, risk tolerance and time horizon to determine the appropriate portfolio allocation for their accounts.”
By having a plan, respecting risk, and holding yourself accountable to others are three things you can do right now to help you make rational, not emotional, decisions on Wall Street.
This article was written by Adam Sarhan from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.