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Five mind tricks to make you a better investor

Mind over matter: practical steps are only part of the battle

Mind over matter: practical steps are only part of the battle

It’s a tough time to be an investor.

Millions will experience the pain of seeing their portfolios plummet in value as most stock markets around the world have fallen so far this year.

Investors will also feel a rollercoaster of emotions thanks to the severe volatility that has been deployed.

There are many practical steps you can take to protect your portfolio, as we’ve outlined in Wealth over the past few weeks.

Actions such as making sure it is balanced – across asset classes and stock markets – and keeping investment costs low and investing for the long term.

However, practical steps are only part of the battle. Dealing with emotions is also necessary to stay on track during such a difficult time.

Louis Williams is chief of psychology and behavioral insights at financial software company Dynamic Planner.

He says: ‘Our emotional resilience, confidence and optimism – despite what is happening around us – is key to recovery and flexibility in these challenging times for investors.’

Williams believes that investors who are able to successfully navigate times of financial turbulence share important traits.

Here are our tips for developing such mental skills to better weather future investment storms.

1. Get comfortable with uncertainty

Investors must calculate a seemingly endless list of unexpected events – from a global pandemic to the invasion of Ukraine and rapidly rising prices. This lack of control and predictability can create anxiety.

A natural reaction may be to try to take control by selling investments and turning your back on chaos.

However, this simply involves losses and hinders our ability to profit if and when the stock markets bounce back.

So the key is to find other ways to get comfortable with the uncertainty. Instead of focusing on the latest twists and turns, you can step back and look at the bigger picture.

There have been numerous market declines throughout history and prices have always bounced back. It may take a while, but usually there is recovery.

Greg Davies is head of behavioral finance at Oxford Risk advisory group.

He says, “In turbulent times, there’s a huge gap between the decision that feels emotionally comfortable for my short-term self-sell and the decision that’s right for my long-term needs — hang on.

“As humans, we constantly deviate from good long-term decisions to pursue the emotional comfort we crave in the short term. This is costly – we are essentially buying emotional comfort by giving up financial performance.’

But he believes that individual investors have a huge advantage over professional investors: time. “Beign neglect – leaving things alone – can be a very powerful investment strategy,” he says.

You can’t change the way stock markets behave, but you can control how much you pay in investment costs and taxes. So make sure to use your allowances, such as the Private Savings Account, which allows you to invest up to £20,000 tax-free each tax year.

2. Learn to regulate your emotions

It’s hard not to allow your emotions to be ravaged by the rises and falls in the market. After all, wallets are not just money, they are our means of financing dreams, vacations, helping our families and being able to retire.

However, emotion can sometimes cloud our judgment, for example by making us react too quickly when we are worried.

If you’ve built a well-diversified long-term portfolio, there’s no need to check it regularly.

Emma Maslin, money coach and founder of The Money Whisperer personal finance website, says: ‘In a world where we’re used to checking phone apps multiple times a day, it’s all too easy to be hyper vigilant about the value of our investments.

“But investing is for the long term and investors shouldn’t need to check investments too often, especially not several times a day. Maybe delete your investment app if you look at it often and worry.’

Also remember the good times. Your portfolio may fall in value this year, but will likely rise over the past three years. In a broader context, it might not look that bad.

Clive Beagles is a senior fund manager at investment fund JOHCM UK Equity Income.

He says: ‘During periods of market sell-off, the natural human response is to shorten our time horizon and focus on short-term negative noise.

“It’s times like these, when our instincts can lead us in the wrong direction, that a well-established investment process can help avoid behavioral pitfalls.”

3. Boost your confidence

When the value of your portfolio falls, it’s easy to see it as a reflection of your abilities as an investor.

A lack of confidence in your financial plan can increase the risk of you tweaking and getting off track.

So remember why you made individual investment decisions in the first place. If your rationale hasn’t changed, you can rest assured that you’re still on the right track.

Also, swod up. By reading why your portfolio is falling, you should ensure that most investors are in the same boat.

4. Limit your impulses to act rashly

Investors often mistakenly make rash decisions based on emotions rather than strategic thinking. This is normal. However, there are things you can do yourself to limit or prevent the resulting damage.

First, think about what drives you to trade a particular investment.

For example, are you interested in buying because it is the right investment for you, or because you are afraid of missing an opportunity where you see others making big profits? Don’t be influenced by the decisions of others.

Second, inject money into your wallet instead of adding lump sums.

In this way you minimize the risk of a market decline just when you have invested. It also prevents you from trying to time the market, which is an almost impossible feat.

5) Increase your resilience with a cash buffer

Don’t invest money that you need quickly. Market declines are stressful enough, but when they wipe out money that you could use to live on against a backdrop of rising prices, they can be especially painful.

Make sure you have a healthy cash safety net before putting more money into financial markets.

You should have about three to six months of cash outlays before you start investing — or more if you’re using your investments for a living (for example, in retirement).

By having a cash buffer, you don’t have to sell when the markets fall, which limits losses.

Also pay off any unsecured debts. Reducing debt improves your financial resilience because you are less vulnerable if interest rates continue to rise – as predicted – or your income falls.

Compare the best DIY investment platforms and stocks and shares Isa

1659748839 470 Interactive Investor cuts share and fund dealing fee to 599

1659748839 470 Interactive Investor cuts share and fund dealing fee to 599

Online investing is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.

When it comes to choosing a do-it-yourself investment platform, stocks and shares Isa or a general investment account, the range of options may seem overwhelming.

Each provider has a slightly different offering, charges more or less for trading or holding stocks, and gives access to a different offering of stocks, funds and mutual funds.

When weighing up the right one for you, it’s important to look at the service it offers, along with administration and transaction fees, plus any other additional costs.

To help you compare investment accounts, we’ve put together the facts and put together a comprehensive guide to choosing the best and cheapest investment account for you.

We highlight the key players in the table below, but encourage you to do your own research and consider the points in our full guide linked here.

>> This is Money’s full guide to the best investment platforms and Isas

The platforms below have been independently selected by the specialized journalists of This is Money. If you open an account with links marked with an asterisk, This is Money earns an affiliate commission. This should not affect our editorial independence.

Administration costs Notes on Cost fund trading Standard Stock, Trust, ETF Trading Regular investing Dividend reinvestment
AJ Bell YouInvest* 0.25% Max £3.50 per month for stocks, trusts, ETFs. £1.50 £9.95 £1.50 £1.50 per offer More detail
bestinvest* 0.40% Account fee reduced to 0.2% for turnkey investments Free £4.95 N/A N/A More detail
Charles Stanley Direct 0.35% No platform fee on shares on a trade in that month and an annual maximum of £240 Free £11.50 N/A N/A More detail
Fidelity* 0.35% on funds €45 to €7,500. Max £45 per annum for stocks, trusts, ETFs Free £10 Free Money £1.50 Shares, Trusts ETFs £1.50 More detail
Hargreaves Lansdown* 0.45% Capped at £45 for stocks, trusts, ETFs Free £11.95 £1.50 1% (£1 min, £10 max) More detail
Interactive Investor* £119.88 as £9.99 per month £7.99 per month back in trade credit £7.99 £7.99 Free £0.99 More detail
iWeb € 100 one-time £5 £5 N/A 2%, maximum £5 More detail
Free trade* Free for standard account £3 month for Isa Freetrade Plus with more investment is £9.99/month incl. Isa fee No money Free N/A N/A More detail
Forefront 0.15% Only Vanguard Funds Free Free Vanguard ETFs Only Free N/A More detail
(Source: June 2022. Annual administration fee, can be monthly or quarterly)

Some links in this article may be affiliate links. If you click on it, we can earn a small commission. That helps us fund This Is Money and use it for free. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.