Brexit. The Greek debt crisis. Donald Trump's victory in the U.S. presidential election. These are just some of the events that can cause investors' emotions to run high, leading some to make decisions that might hurt future returns.
While every year has events that lead to increased anxiety and volatility for a period of time, investors can learn from their past mistakes so that they don't repeat them.
"The more educated that investors are, the less emotional they are," said T. Michelle Jones, CFP, Vice President at Bryn Mawr Trust (BMTC) - Get Report . "To enhance that, working with an investment manager can help you stay on track with your long-term goals."
Over a 20-year period from 1996 to 2015, stocks returned 8.19% on average per year, but the average investor returned just 2.11%, less than the 2.18% inflation seen over the same time frame.
At times of market highs, the average investor is likely to experience euphoria, which can be measured in a multitude of ways. One way which investment pros often look at is investor sentiment measured by the American Association of Individual Investor's Investor Sentiment Survey.
The historical average for the survey is 38.5% bullish, but in the week ending December 28, 2016, the reading was 45.6% bullish, indicating investors are more optimistic than usual, while adding optimism is not at "excessive levels."
The AAII found that optimism ended the year on a high-note, the third-highest level of the year and up 20.5 percentage points from a year ago. "The current seven-week stretch of plus-40% readings is the longest such streak since a nine-week stretch between October 15 and December 10, 2014," AAII's website read, following the results of the survey.
Here are 5 steps to take on how to take the emotion out of managing money and become a better investor.
Even though owning stocks in the same sector might be fun or interesting, it may not be the best strategy, said Jones.
"You can stay on track with your long-term goals with diversification and asset allocations," Jones added. "That's important, because people tend to gravitate towards a company that has done well, but in investing, the best returns often come from companies that are just the opposite -- it's the buy low, sell high mantra."
2. Educate yourself, but don't over-analyze.
Just because you see a headline about a company from a newspaper or on TV, it doesn't necessarily mean you should chase that stock, Jones said.
"While a great source of information, oftentimes the media is more focused on short-term trends and day trading," Jones said. "Turn off the news and put down the paper so that you don't focus on day-to-day price movements. Base your decisions on company fundamentals and you won't lose site of your goals."
3. Don't binge shop.
Even though binging might be fun if you're watching House of Cards or Game of Thrones, it's probably not the best way to build a portfolio.
"There are effective strategies that invest equal dollar amounts, known as dollar-cost-averaging," Jones said.
With this strategy, investors purchase shares of a company at different times, knowing that some purchases will be higher and some will be lower. For example, an investor may want to purchase 100 shares of Apple at $99.80 and 100 shares at $108.20, compared to 200 shares at $105 and being done with the investment. "It prevents investors from investing at the wrong time," Jones added.
4. Span the globe.
Having exposure to different asset classes can help reduce risk, Jones noted. "A lot of investors may just think of larger companies that they've read of, but exposure to emerging markets and having different sub-asset classes in their portfolios can help produce above average returns," he said.
5. Reduce your risk.
Even if an investor doesn't have $1 million in assets, they can still educate themselves and learn to take risk out of their portfolio, either by investing in mutual funds or ETFs.
"Investing in mutual funds or ETFs is less risky than investing in individual stocks," Jones said. "The more educated you are, the more you know and the less emotional you become."