Damaging results as emotions can drive your investment decisions

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Glance at a stock market’s performance over the course of a few weeks, and what stands out is probably not the general direction of travel, but the short-term see-sawing of prices.

Short-term volatility shouldn’t matter to long-term investors – it’s just an inevitable part of investing. But even long-term investors can all too easily respond emotionally to short-term volatility; and make bad decisions as a result.

The 24-hour news cycle doesn’t help either, since it makes us far more aware of short-term fluctuations than long-term trends and opportunities. However, investing generally pays off over the long haul.

The best an investor can do is to know themselves and be ready to manage their emotions when markets rise and fall. After all, even the most prudent investors will respond emotionally to market fluctuations – what marks them out is not their lack of emotions, but how they manage those emotions.

Understanding how this works may be half the battle. As the chart shows, investor emotions tend to move in tandem with stock markets. Thus we often become optimistic and self-confident with markets rise, only to descend into fear and panic when they fall.

But whatever you’re feeling, avoiding the temptation to overreact is key to your long-term investing success. So long as you’re aware of the risks, you will be better equipped to manage your emotions the next time markets test your resolve.

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