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I’m going to say mainstream, or old-fashioned, but people in the business world believe that portfolio stability is the most important factor in investing. Is that the right thing to do? If you’re a rational investor with a long-term vision, the answer is probably yes.
But honestly, does it really matter how diversified your portfolio is if you lose control of your emotions when the market starts to crash and the value of your assets starts to decline? Without mental resilience, it is difficult to achieve financial success (though there are certainly exceptions). Diversification is an important tool for risk management, but the ability to stabilize investor sentiment is equally important.
Staying calm isn’t just about staying calm when things get rough. It’s also about making thoughtful decisions when everything seems to be going off the rails. From my professional and personal experiences, I have learned that mental resilience is a must. In many ways, that’s what actually makes things that cost a lot of money work.
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Portfolio diversification does not guarantee peace of mind
Perfect diversification has been considered the platinum standard in investment practice. The simple magic behind this statement is that diversifying your assets between stocks, bonds, real estate, or start-ups helps reduce risk.
If one small (or large) part loses value, other parts remain stable or even gain profit, minimizing overall losses. And we investors love it when the potential risk goes down. This strategy is how business people deal with crises, political unrest, and other uncertainties.
But there’s a catch. No amount of diversification can protect you from market disruption. That’s impossible, of course. Amid difficult economic uncertainty, even the most diversified portfolios face significant pressure.
The 2020 coronavirus pandemic is an example of how it affected multiple sectors at once. Even those who followed all the diversification rules were feeling the pain. Some assets have since recovered, while others are still struggling, but everyone is struggling at the moment.
Emotional discipline should be emphasized here. Investors who can’t control their emotions often do more damage to their portfolios than the market itself. Panic selling during a crash or overly optimistic buying during a peak are common mistakes that lead to avoidable losses. There is no value in diversifying unless you have a clear and stable mindset to take advantage of it. That’s natural, right?
Related: How to embrace life changes and evolve your sense of purpose
Emotional resilience is a soft skill we all need, but investors need it more than others
We all know about soft skills, right? Adaptability, communication, and stress management have become essential to success in business. But what if we told you that investing has its own soft skills? Yes, that’s no surprise. But one of the most important is emotional resilience, a skill that plays a key role in decision-making.
Emotional resilience helps investors stay calm during market turmoil. When markets are volatile or your startup faces unexpected challenges, using this skill can help you maintain strategic focus and avoid panic. A calm mind leads to rational decisions. This seems logical to me.
Rather than reacting impulsively, experienced investors use this skill to analyze situations and assess the impact on long-term goals. In theory, this approach prevents hasty decisions and helps you discover opportunities where others only see risks. Surprisingly, when it comes to actual practice, it works exactly the same.
Financial markets are all about change. This is an unshakable fact. Markets ebb and flow, startups make or break, and even the most seasoned players can be overwhelmed by chaotic headlines. At times like these, emotional control is the critical skill that separates successful investors from those who succumb to panic.
How do you develop this soft skill?
Emotional resilience is a soft skill, which means it can and should be trained and cultivated. Here are some simple methods I use every day to strengthen this soft skill.
Make a clear plan. A detailed, well-thought-out strategy reduces uncertainty. When you and your team have a plan, you know what to do in any situation and it’s easier to stick to your course. Be sure to have a plan B, C, and D as well. Learn to accept volatility as normal. Markets are always changing. It’s just a part of the game that we can’t change. Breathe! Accepting this as inevitable can help prevent emotions from controlling your decisions. Trust in diversification. If you diversify your assets wisely, you have built-in protection against significant losses. Remember this when markets are turbulent. Surround yourself with experts. Working with a financial advisor or experienced partner can help ease the burden. Advice from outside can often help you see the situation more objectively.
Emotional resilience and diversification are complementary, taking different paths towards the same goal. Diversification protects your portfolio from market risk, but emotional resilience protects yourself. The financial and psychological well-being of investors is the foundation of long-term success.
After all, investing is about remaining confident in your decisions even when everything around you suggests otherwise. Strengthening your emotional resilience may be the best investment you can make in yourself.