Is Emotion Affecting Your Investment Decisions?

We are all likely familiar with the term “emotional roller-coaster,” and the term is fitting in describing the last several months as we continue to deal with Covid-19 and its second-order effects on culture, family dynamics, and the economy. As humans, emotions aide and enhance our lives in so many ways, but allowing emotions to affect your investment decisions is dangerous. Regardless of your investment strategy, allowing emotions to impact that strategy will likely lead to poor investment outcomes. Below are some tips to reduce the negative financial impact of emotions.

Develop and Believe in a Process

The key to stripping out emotion and achieving long term investment success is not just to have a process, but have one you truly believe in. The first step to that end is to establish goals. View goals as the direction and foundation for all future decisions. Without goals, there is no way to determine the appropriate amount of risk exposure needed to achieve those goals.

Next, determine your level of risk. The key here is to establish a rate of return expectation and match your risk to meet that return expectation, which grows your savings in such a way to stay ahead of inflation and maintain lifestyle over the long term. Once you find the minimum amount of risk you must take to achieve your goals, it’s not necessarily wrong to increase risk as long as you understand an increase in volatility comes along with it.

The last step, and perhaps the most difficult for most retail investors, is to establish a buy and sell-side discipline. The keyword here is “discipline!” Without this buy/sell-side discipline, your strategy is almost guaranteed to fail as you will have no guidelines in which to make rational/informed decisions. Some common metrics used in establishing this discipline are business fundamentals, including financial strength, free cash flow generation, dividend payouts, etc., and valuation metrics like price/earnings, price/sales, price/free cash flow ratios. If these metrics are foreign to you, then look to a professional for help.

Adhere to Your Process

Once you are confident in your process, rate your adherence to the process when markets become extremely volatile. The past several months offered an excellent test case, so if you had a process, how would you grade yourself on adhering to it?

Two things to remember here:

  1. No investment strategy works 100% of the time, so if you are not mentally prepared to experience occasional losses in investment value, you should not be investing.
  1. Investment processes only work if you follow them! My colleague Stewart Welch says, “1/3 of the time you will be happy with your process, 1/3 of the time you will be somewhat satisfied, and 1/3 of the time you will be unhappy.” Coming to terms with this dynamic will help you navigate the good times and bad!


Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.

 Fox 6 Talking Points:

  • Develop and Believe in a Process
  • Adhere to Your Process



Marshall Clay CFP, JD, is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters. 



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