By: Dividend Sensei
In the first three parts of this risk management series I’ve explained the importance of:
- Understanding the true nature of risk
- Keeping stock market volatility in context
- Having a realistic view of your own long-term goals
In this article let’s explore one of the most important aspects to proper risk management, investing, and life in general. Specifically I’m talking about emotional control and staying calm in the face of short-term market panic.
As the saying goes, “Rome wasn’t built in a day”, and the same is true for any long-term financial goal. The bigger the goal, say saving for retirement, the more important it is for investors to avoid making the kind of emotion driven mistakes that result in terrible long-term total returns.
According to numerous studies, including this one from JPMorgan Asset management, investor attempts at market timing have historically resulted in absolutely abysmal returns. For example between 1996 and 2015 not just did the average retail investor underperform the S&P 500, but all asset classes and even historically low inflation.
A helpful way to avoid overreacting to short-term market gyrations is to remember the 10/10/10 rule. That says that you need to keep in mind how you’ll feel about any decision/event in 10 days, 10 months, and 10 years. This is a great way to help you avoid acting on short-term knee-jerk emotions, and instead take a long-term perspective.