Emotions and risk in the world of investing

Thinking of dipping your toes in the investing world? Investing is one of the key financial decisions you can make, and it’s a road with both risks and rewards.

As it goes with all things money, investing can be as much an emotional decision as a pragmatic one, so it’s worth taking the time to understand the level of risk you’re comfortable to take, and how it may affect you. Here are some key things to keep in mind.

Knowing your investor personality

Whether it’s KiwiSaver, managed funds or cryptocurrency, all investments come with a level of risk. Higher-risk funds are likely to be more volatile, but they are also likely to deliver higher returns in the long term.

The key thing is to understand what level of risk you are comfortable taking, based on your goals and your ‘investor personality’ (or investor mindset). And a lot of it has to do with emotions. Some emotions are inevitable and even necessary (we’re emotional beings, after all). Others can get in the way of your investment goals, so it’s important to prevent them from taking over.

For example, if you’re invested in a higher-risk fund but you have a low tolerance for risk, you may not be comfortable with high volatility. And as a result, a market correction may prompt you to make an impulse decision, like moving your money to a lower-risk fund when markets are at their lowest, crystallising your losses.

This unfortunately happened a lot in 2020, when many KiwiSaver members switched to lower-risk funds after seeing their savings dip. The market downturn was short-lived and KiwiSaver funds bounced back relatively quickly, but those KiwiSaver members had ‘jumped off the train’ too soon and didn’t take advantage of the recovery in full.

Key questions to get you started

Everyone is different and so is their emotional response: having a conversation with an adviser can help you understand the link between your emotions and your risk profile.

In the meantime, here are some thought-provoking questions to get you started:

• Do you check your KiwiSaver balance multiple times each month?
• Do you often think about your fluctuating account balance?
• Do market downturns make you doubt your investment decisions?
• Do you ‘follow the crowd’ when making decisions?
• When it comes to your goals, do you focus more on the short- rather than the long-term?

When it comes to KiwiSaver, it’s a good idea to review your account at least once a year, to ensure that it’s still aligned with your needs. As for your KiwiSaver balance, checking in every three or six months should be enough in most instances. It’s good to have visibility of what’s happening in your account. But keep in mind that KiwiSaver is a long-term investment vehicle, so there are downsides to checking your balance too often. For example, seeing your balance fluctuate may stress you out, prompting you to act on market fluctuations.

And the same principles, of course, apply to long-term investing as a whole.

The bottom line? If you’d like to make the most of your investments, check that your portfolio is appropriate for your risk profile, set your sights on the long term, and of course, seek quality advice.

Like to learn more?

When investing, staying the course through short-term volatility is often the key to longer-term success as an investor. Emotional investing is one of the most common mistakes people make, and reacting to the latest breaking news (good or bad) is often a sign that decisions are being driven by emotion rather than reason.

Depending on your investment portfolio, there can be different strategies to reduce the risk of emotional investing. Like to discuss this further? Get in touch – as investment advisers, we are here to help you understand your investor personality in more detail, so you may march forward to achieving your goals. ‍

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Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.