Few people would argue that emotional investing is a good idea. It's what propels people to buy high and sell low, and ruin their returns along the way. But being objective is easier said than done. And I believe it will only get more difficult to build a portfolio that will not raise your emotional anxiety.

Few people would argue that emotional investing is a good idea. It's what propels people to buy high and sell low, and ruin their returns along the way. But being objective is easier said than done. And I believe it will only get more difficult to build a portfolio that will not raise your emotional anxiety.


Globalization has pulled the world economy closer together. Fifty years ago, an earthquake in Japan would have had less of an impact on our domestic economy. When that tragic event happens now, the reaction in the U.S. is swift and drastic.


We are now seeing more shocks to our financial system. This isn't necessarily just because more shocks are actually happening, but because more of them affect us now. The more markets are open to a company, the more likely it is that something negative will happen to some part of the company's customer base.


Volatility has increased in recent years, and that volatility will give people many more opportunities to make emotional (read: bad) investing decisions. Individuals will be more likely than ever before to underperform the market. Roller-coaster market swings will be more common, bringing along the stomach-churning urge to pull out of the market completely or dive back in. While people may get lucky on occasion, this is not a recommended long-term investment strategy.


An index or a specific investment may have had a certain return over the last few years, but how much of that return did the average investor experience? The answer is usually not as much as you would expect. The average investor frequently lags the returns of widely publicized indices because of their emotional in-and-out moves.


These emotional tendencies may be even more significant as many Americans adjust their portfolios from being U.S.-dominated to more globally diversified. Not too long ago, investors were satisfied with mostly domestic holdings, a small percentage in developed foreign nations and just a touch of emerging markets, but now managers are lowering U.S. exposure.


A more objective investment posture not swayed by emotions is becoming increasingly important. This is not to say that your adviser, or even the best adviser, will always be right when it comes to investing. But they should be wrong less often than an emotionally driven manager.


John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at jnap@uswealthcompanies.com.