Managing the Emotions of High-Net-Worth Investing
Key Points
A rational investment strategy lays the foundation of your financial plan and helps prevent investors from making harmful, emotionally charged decisions.
Understanding your own emotional responses should help guide your investment strategy so you don’t sacrifice your everyday quality of life.
Working with a trusted financial advisor you trust is key to navigating challenging times and capitalizing on opportunities.
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If you’ve ever invested in the stock market, you know how emotional it can be. Riding the roller coaster of news headlines can make investing seem scary and dangerous. At Capstone Financial Advisors, we work to ensure our clients feel comfortable even through worrisome times. Volatility in the market is why we discuss risk tolerance with all our clients at the beginning of setting up their financial plan and continue to monitor throughout our relationship.
If you’re a high-net-worth individual, you have your own set of unique challenges. One of the most overlooked aspects can be managing emotions when making investment decisions. The stakes are higher with larger sums of money, and watching your portfolio incur a15% decline in a bear market can evoke intense emotions.
With substantial wealth comes greater responsibility to preserve and grow those assets over time. Mastering emotions when investing can help you achieve long-term financial success.
Lay the Foundation With Your Investment Strategy
A rational, goal-oriented investment strategy is the foundation of your financial plan. With your Wealth Advisor, you’ll want to establish clear financial goals that align with your life plan and reflect your risk tolerance. For instance, while a more aggressive strategy may sound good on paper, it makes you more vulnerable to those headlines. If you find yourself feeling stressed or unable to sleep through volatile market conditions, you may need to adjust your strategy to maintain your current quality of life. There’s a balance we’ll want to achieve.
Creating a comprehensive, long-term investment plan can help protect you from overreacting to short-term market fluctuations. Major life events are going to happen from time to time, both personally and in society. For example, every four years, a presidential election affects investment outlooks and options. This is where the expertise of seasoned financial advisors makes a difference in learning to overcome emotional roadblocks to stick to your investment strategy.
Develop Investment Emotional Intelligence
You’ll benefit greatly from developing emotional intelligence — the ability to recognize and manage your emotions — around your wealth management.
Emotional biases like overconfidence, loss aversion, and herd mentality can cause investors to make irrational decisions. When an asset takes a downturn, for instance, an immediate instinct might be to sell out to avoid further losses, but this is abandoning sound financial principles that put your goals at risk. The aim is to buy low and sell high, not the other way around.
Disciplined adherence to your investment principles helps make bear markets feel a little less worrisome and allow you to stay your course even when others are abandoning strategy. Impatient investors easily give in to urges like untimely selling after losses or chasing performance. Emotionally intelligent investors understand that quality investments require patience to fully manifest their potential value.
View Short-Term Volatility Through a Long-Term Perspective
Throughout history, we’ve seen fear and greed fuel market bubbles and crashes. Rather than letting this volatility deter you, further strengthening your emotional intelligence will allow you to embrace it as an opportunity.
Some risk is inherent to generating worthwhile returns, but history also shows that staying invested in the market during these times is usually the best choice due to the recoveries that follow. This is especially true for high net-worth investors because selling larger holdings can significantly increase the risk of missing out on potential gains.
There are a lot of layers to investing beyond just buying and selling funds in the stock market. Strategic risk management through diversification across asset classes, geographies, and sectors can help mitigate the emotional impact when individual investments underperform. A diversified portfolio can also make it easier for investors to make decisions from a calmer mindset and prioritize long-term goals over short-term volatility.
How to Become More Emotionally Intelligent Around Investing
Setting realistic expectations that align with your risk tolerance for your portfolio’s performance helps prevent overly optimistic assumptions from leading to disappointment. Surrounding yourself with a supportive network of like-minded investors can also give you valuable emotional guidance. This is when your financial advisor can be most helpful, especially for high-net-worth investors.
In The Psychology of Money, Morgan Housel writes, “People do some crazy things with money. But no one is crazy.” We all come from different backgrounds and have our own personal experiences with money growing up. What is important is acknowledging that you can continue to develop skills, like emotional intelligence, to become a wiser investor.
Mastering the emotions of investing is ultimately a journey of self-improvement. This ability to maintain rational investment discipline can mean the difference between long-term wealth creation and missed opportunities. When choosing a financial advisory firm, you’ll want to make sure you choose someone you can trust and who can help support your emotional responses.
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review by contacting us at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833.