Fear and emotion can often be the enemy of an investor's portfolio. TIAA Wealth Management Division Chief Investment Officer Niladri Mukherjee and Tidal Financial Group Portfolio Manager Michael Gayed join Yahoo Finance to give insight into how to handle heavy emotions when investing.

Gayed explains that strategies for regulating one's emotions have real financial implications: "The number one thing to remove emotion is to not look. There's all kinds of studies that show when people look at prices they're tempted to overtrade. Those that look at their portfolio quarterly as opposed to monthly or daily tend to have better long-term performance."

Mukherjee reminds investors about the value of staying invested over the long term: "What history has shown is if you can just stay invested in the market over the long-term, your returns are much better. Just to give you an example, if you stayed in the market over the last 20 years, your average annual returns are about 10%. If you miss the best ten days in the market, your returns drive to 5 1/2%, which is half that. And if you miss 20 best days, the returns drop to 2.8%. "

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

BRAD SMITH: Now, if you're going to use your tax refund to help build your investment portfolio, what is the best way to go about it? Well, our number one tip, keep fear and emotion out of it. At the end of the day, markets are made by human beings and largely driven by sentiment. So how do you keep a steady head in this investing cycle?

Here to tell us, we've got Neel Mukherjee, who is the TIAA Chief Investment Officer of the Wealth Management Division. Plus, Michael Gayed, who is the Tidal Financial Group Portfolio Manager. Thank you so much, both of you for taking some time here in studio with us.

This is complex, because, obviously, you have some emotion when it comes to your portfolio. But how do you go about removing fear and emotion from your investment decisions? Michael, I'll begin with you.

MICHAEL GAYED: Well, don't follow my X account, because I tend to be pretty emotional in my posts. Look, I think, it's important that we're distinguishing between short term and longer term, short-term trading, longer-term investing.

I think the number one thing to remove emotion is to not look, meaning, there's all kinds of studies that show that when people look at prices, more often they're tempted to overtrade. There's all kinds of studies that show that those that tend to look at their portfolio quarterly, as opposed to monthly, or daily, tend to have better longer-term performance.

What causes people to be emotional from a fear and greed perspective is real-time pricing. And I think to the extent that investors can try to remove that, and remove social media as much as possible, or, at least, have a dedicated time frame under which you actually look at that information, you're probably better off that way.

BRAD SMITH: Neel, there is so much emotion that gets pulled into this environment, when you hear about some of the massive run ups, whether that's driven by themes like generative AI, how can you be more calculated even with those decisions that you're making along the way?

NILADRI MUKHERJEE: Yeah. Well, I would say that number one is time in the market is more important than timing the market. I think for an average investor, one of the mistakes that they make is they let fear and emotion, to your words, get in the way of prudent portfolio management.

And what history has shown is if you can just stay invested in the market over the long term, your returns are much better. So just to give you an example. If you sit in the market over the last 20 years, your average annual returns are about 10%. But if you miss the 10 best days in the market, your returns drop to about 5.5%. So it's half that.

And then if you miss the 20 best days, the returns drop to 2.8%. So the number one thing you can do is stay invested in the market and have a financial plan, which is in sync with your goals, your financial goals, your risk tolerance, and your time horizon.

BRAD SMITH: There's a tool out there that a lot of people commonly call the fear gauge index, which is the VIX, CBOE's VIX. We're sitting at like 13 right now. So there's not a lot of fear that's out there in the market right now.

But for investors, who are trying to best anticipate what the next major opportunity is, or where they're using a tax refund and those hard earned dollars that they're getting back now from the government and putting that back into their portfolio strategy, what do you remind them along the way, when they are allocating some of that to a major investments, Michael?

MICHAEL GAYED: Well, there's fear of missing out, which is the fear that's happening.

BRAD SMITH: FOMO.

MICHAEL GAYED: I will say, by the way, that point is very valid about the 10 worst days, 10 best days. The interesting thing about that is that if you remove the 10 best days and 10 worst days, you have the same return as buy and hold, because those extreme days happens in periods of volatility when emotion and overtrading tends to happen.

So I think you're going to look at from the perspective of where do you allocate, know thyself, which means that you've got to know how you're going to respond to volatility. If you're going to respond poorly to volatility, you might want to be in low volatile investments. Avoid the fear of missing out. Avoid the FOMO that causes people to then chase at the wrong time.

And consider that the reality is markets, yes, they tend to move over the long term. But the long term is very hard to achieve. The joke about buy and hold is that very few people actually hold.

BRAD SMITH: We're getting into a critical time where there's going to be a great wealth transfer that we were discussing with one of our guests earlier, as well here. And that could also mean a great wealth transfer in ideologies of investing. Where is the biggest shift that you're anticipating there, Neel?

NILADRI MUKHERJEE: Yeah. I think you're absolutely right. First of all, investors generally are feeling quite nervous you talked about tax free funds. And it's prudent. In a way you can understand why investors are nervous, because asset prices have gone up quite a bit.

But what I would remind investors is that volatility is quite common in the stock market. So 5% like pullbacks happen on average three times a year, 10% like pullbacks happen once a year. And volatility is that invisible hand, which shakes off the excesses in our market-based economy.

So that on the other side, better capital allocation decisions are made. So to your question as to what to do with those tax free funds, I would say, US equities, participating in the US growth story is a great way to think about deploying that, because over the long term, over the next seven to 10 years, you will find that the US economy will benefit from many trends. The AI proliferation, innovation proliferation, investing in high-end manufacturing industries here.

And the millennials are now getting into their prime age of investing, consuming, and earning. That will drive the stock market multiples too. So not being in cash-- I think being in cash has a sedate effect and investors feel comfortable. But just participating in that long-term allocations makes the most sense.

BRAD SMITH: I saw you nodding your head, Michael.

MICHAEL GAYED: Yeah. You're 100% right. Time in the market. I'm always public about the idea that the last thing you want to do is short. The last thing you want to do is do cash. And that it's much better to be exposed to a market.

Now, the thing is most people define the market as the S&P 500 or as the NASDAQ. There are many, many different types of markets. So my view is it's better to try to rotate. Hopefully, the cycles in your favor. Talk about AI, if the AI dynamic is real, three things probably play out for different markets to invest in.

Lower bond yields-- it's disinflationary. Small caps running-- benefit from the margin enhancement of AI.