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Prevent Emotions from Undermining Your Portfolio

Being rational can be hard when it comes to managing money. In a perfect world, every investor could “buy low and sell high”—however, the realities of markets often prove more complex, and require a more measured approach.  

Take losses, for example. When your portfolio value falls sharply, you may hold a declining investment, hoping the price will rise again—at least up to the price you paid so you can break even. This kind of loss aversion can prevent you from taking the right steps for sound portfolio management.

On the other hand, when markets are boisterous, overconfidence can prompt you to ignore diversification, or trade too often. It can prevent you from paring your winners when markets are too frothy, and set you up for losses when your “winning” securities reverse course.

Whether your investments are increasing or decreasing in value, your emotions can steer you in the wrong direction.

The Emotional Toll on Your Portfolio

Buying and selling—or selling and then buying—in the hope of catching higher returns is a common investor foible. And in large part, emotions explain why investors consistently underperform the markets. The difference, sometimes called the “behavior gap,” adds up over the years. For example, over a ten-year period ending in December 2017, the typical fund gained an average of 0.72% more than the typical investor each year—leading to a cumulative average shortfall for the investor of 13.3% for the ten-year period.

Source: Schwab Center for Financial Research with data from Morningstar, Inc. Fund return is the weighted average time-weighted return of all active funds in the Morningstar domestic equity, specialty, and international stock categories.  Each fund is represented by its oldest share class.   Investor return for each fund is calculated by Morningstar and reflects the average return on all dollars invested based on estimated monthly net fund flows. The aggregate investor return and fund return are averages weighted by the size of each fund. Only funds with both the fund return and the investor return are included in the analysis. Past performance is no indication of future results.

Choosing, implementing, and maintaining a well-thought-out investment strategy can help you avoid some common investment mistakes. In fact for decades, academics who study the intersection of psychology and money—a field known as “behavioral finance” —have argued that if investors could only remove emotion from their financial decision-making they would stand a better chance of reaching their long-term goals.

But on a personal level, ignoring your natural responses to market gains or setbacks can be as challenging as giving up sweets or sticking with an exercise program.

What You Can Do Next

Your emotions might still surface when you think about money, but you can avoid being ruled by them. If emotions interfere with how you choose and manage your investments, consider a robo-advisor.

  • Schwab Intelligent Portfolios® provides an automated investing platform that could help you to skirt your personal biases and emotional reactions. 
  • If you prefer more personalized guidance, consider Schwab Intelligent Portfolios PremiumTM. A CERTIFIED FINANCIAL PLANNERTM professional can help you fine-tune your financial plan.
  • Call us at 800-355-2162 or visit your local branch to discuss all your options.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risks including possible loss of principal.

Tax-loss harvesting is available for clients with invested assets of $50,000 or more in their Schwab Intelligent Portfolios account. Clients must enroll to receive this service.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Charles Schwab & Co., Inc. (“Schwab”) recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochure for important information, pricing, and disclosures relating to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs.

Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co. Inc. (“Schwab”), a dually registered investment advisor and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. ("CSIA"). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.


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