Emotional investing can be a huge detriment to your portfolio. It’s another one of those interesting concepts, since humans cannot totally eliminate emotion. It’s a part of our existence! The key is to not only control it, but also recognize how it impacts your financial decisions.
Confidence and a positive attitude are good traits to develop. The problem is, sometimes we become overconfident in our abilities. This is especially true if we experience a little bit of success. I know I can relate to this in my own experience. Just when I think I have things totally figured out, reality brings me right back to earth. Our mind is a marvel, but sometimes it can play tricks on us!
My Introduction to Emotional Investing
When i first started investing in stocks, I went totally on emotion. That was many years ago, but it taught me some valuable lessons! A couple of companies I invested in manufactured sports equipment I liked. Another one was an automotive company that I thought was a cant-miss. I had nothing to base my investments on except for a positive feeling that had no business basis. I was clueless as to the management of the company or their actual performance. Needless to say, I didn’t make any money!
The other problem is that I bought and sold at the wrong times. I would watch the stock ticker, and if there was bad news about the company, I would sell. On the other hand, if there was positive news, I would get right back in! This is a recipe for losing money in the stock market. Thankfully, I learned rather quickly that I was not on the road to success, so I stopped the roller coaster and began to learn new investing strategies.
Confidence and a Dose of Reality
The way I was investing reminded me of colleagues who took trips to Las Vegas. I remember talking to so many of my co-workers who were going to Vegas and were convinced they were going to hit it big. They could taste the success, and they could imagine themselves walking out of the casino much richer. Unfortunately, the confidence and emotion was hit with a dose of reality and simple math. The odds were stacked against them from the start.
If you are an emotional investor, you might relate to some of these experiences. What are some things you can do to avoid emotional investing and maximize the value out of your portfolio?
Set Firm Financial Goals
I talk about financial goals in just about every post I write. They are that important! What do you want your money to accomplish? What things are important to you? How can you prepare for a future of financial independence? These are all critical questions to ask. Take the time to set financial goals. When your money has a purpose behind it, you become much more deliberate in your approach to investing.
Replace Emotional Investing With Diversification
One of the thing that helped me become a better investor was learning about diversification. Instead of trying to pick winners in the stock market, I learned to buy index and mutual funds. I admire the work of John Bogle, founder of Vanguard. Mr. Bogle did so much for the average investor in his career. His books are such a big influence. One of my favorite quotes from Mr. Bogle is, “Don’t look for the needle in the haystack. Just buy the haystack.”
Academic data shows that the average investor is best served through diversification. It’s really hard to pick winners in the stock market. Even professionals who are expert investors struggle to beat the market year in and year out! Another quote from Mr. Bogle worth pondering is: “Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.” This sounds great, doesn’t it? The hard part is getting the right emotional attitude in order to invest in this way.
When times are good, you may feel academically that you can handle market turbulence. But what happens when the markets drop 20%? Your attitude probably changes, right? That’s human nature and normal. We are wired to avoid loss. However, research shows that people with a long-term view who do not overreact to market downturns succeed. You have to commit to following your plan, and not give into fear. That can be a challenge when times are tough.
Avoid the Noise of the Financial Media
The financial media is big business. There is a constant flood of information available about investing. If you react to every bit of financial news and advice, you’ll be running in circles. One TV personality may love a stock and scream “buy”, while another hates it and yells “sell”. You’ll hear people that have a positive outlook on the overall market, while many others will shout gloom and doom.
Let your financial goals drive your investing behavior. As you approach financial milestones, you’ll adjust the risk level of your portfolio. That helps takes the emotion out of the equation. Emotional investing reacts to every bit of news and sign of negative movement. The financial media feeds on these types of people. Remember, ratings sell. There are many in the financial media that give sound advice. However, it can be difficult to identify those people when emotion gets involved.
Replace Emotional Investing With a Rock Solid Plan
Despite the challenges, there is a lot of good financial media out there and a wealth of knowledge available on the internet. It can take a lot of time and effort to sort through the various outlets and decide what is best for you. You will get a good feel for what is based on fact and reality over what is based on hype and illusion.
The bottom line is what always counts in the end. If you are not confident in the information you are getting, look for people with high integrity who will help you sort things out. Look for information that teaches rather than tries to pressure you into a certain “solution’. You and your family are worth the investment of your time and energy.