ARLINGTON, Texas, June 8 /PRNewswire/ -- If you let your emotions guide your stock market choices, you could wind up broke.
Nationally recognized retirement planning specialist Derrick Kinney, Principal of Derrick Kinney & Associates, says that investors who effectively manage their emotions during long periods of stock market volatility tend to make better long-term financial decisions and have higher levels of investor confidence. The powerful combination of financial emotional intelligence and superior investment selection leads to investors achieving higher levels of lasting wealth.
"Emotions can be the greatest enemy of the stock market investor," said Kinney. "Failing to manage your money emotions is often what separates those who acquire wealth and those who chase wealth."
Kinney's work with pre-retired and retired clients from January 2008 through May 2010 has revealed the way investors identified and responded to their fear and emotions during this time of unprecedented stock market volatility. It led them to experience either significant investment returns or mediocre returns at best.
Clients were divided into two categories based on how they managed their money emotions:
1. Concerned Perseverers: The clients verbally expressed their feelings about the impact the stock market drop would have on their retirement plans. We then talked through a process of reviewing their concerns, their emotions and how they were feeling about their accounts. We worked through "what if" scenarios such as "What if the market drops 10%, 20%, 30% or more?" to play out certain investment scenarios. We then agreed on a follow-up communication plan.
Result: These "critical conversations" caused the clients to stay invested or make minor changes to their accounts. As a result, these clients experienced significant investment returns as the Dow Jones Index rebounded from 6,500 to around 10,000. Working together, these clients effectively managed their money emotions.
2. Negative Reactionaries: These clients became very concerned about the stock market volatility. Their perspective was that the stock market would only get worse. They told me only of the negative theories they had heard about. I observe they are allowing external influences to negatively impact them. They've adopted the philosophy that the best course of action is to not be in the market at all and to move all their money to cash.
Result: They directed us to move all their money out of the market and invest in cash and/or CDs because they are frightened of the market uncertainty. One year later, as the stock market has rebounded significantly they now feel frozen in fear and more worried than ever. They have learned that they didn't manage their emotions well and it caused them to miss out on significant appreciation in their investments.
Kinney offers these 5 tips to help investors better manage their money emotions:
- Define Reality - You can control your response to your emotions. You cannot control the ups and downs of the stock market.
- Clarify Feelings - Worry, fear, nervousness, uncertainty, etc.
- Journal Your Emotions - Write down your feelings about seeing your investments fluctuate and the difficulty it may be causing you and your loved ones. It's a therapeutic way to help express your feelings and use them constructively and think more rationally.
- Use the 24-Hour Rule - If you feel tempted to make a rash decision to buy or sell, wait 24 hours. Give yourself time to let your emotions settle down and try to see the big picture. Revisiting the issue a full day later helps you gain a calmer perspective.
- Take Action - You can now make definitive money decisions on what you will do - decide to stay the course or make a change.
About Derrick Kinney & Associates
The firm specializes in guiding clients through the unique financial and emotional issues related to creating their ideal retirements. Kinney has been interviewed nationally as a retirement planning specialist by the Wall Street Journal, Money, Forbes, Kiplinger's Personal Finance and Consumer Reports. http://www.DerrickKinney.com.
Derrick Kinney, ChFC
SOURCE Derrick Kinney & Associates