How To Avoid Emotional Investing?
July 06, 2022
How To Avoid Emotional Investing?
As humans, we have emotions. Decisions based on emotions rather than logic often backfire, and things are no different when it comes to investing. Emotional investing results in impulsive trading and rushed decisions, thereby hampering wealth creation.
For long-term wealth creation and to stay on course to achieve your financial goals, it’s crucial to weed out emotions from investing.
What are Stock Market
Stock market impulses can be referred to as reactions due to market movement. Stock markets never move in a linear fashion. There are ups and downs. A bear phase follows a bull run and vice versa. The response from investors due to this is called a market impulse.
The emotions that come to the fore,
buying or selling, when markets ride high and low, are the impulses or
behaviour that play a vital role in achieving investment goals.
What is Emotional
Emotional investing is an
investing strategy where you make decisions based on markets’ daily gyrations
rather than fundamentals. It constitutes fear, greed, anxiety, and optimism.
This type of investment is based on an investor’s behavioural impulses and is
influenced by market trends. It is more of a cycle where investors react to
market volatility and swings.
How to Avoid
Stock market emotions are
dangerous. It can rob you of your wealth and hurt your life goals. Hence, it’s
essential to keep your emotions under check. To do so, you must:
1. Learn to
Differentiate Between Stock Performance and Business Performance
Investors often confuse stock performance with business performance. You must shift focus from stock price movement to the performance of the underlying business. Note that a bull run often propels a fundamentally-weak stock, and it looks attractive.
Similarly, robust stocks take a beating during a bear phase. In both cases, before you decide to pour money or withdraw, look at the business fundamentals. Find out answers to these questions:
Is the business profitable?
What is the track record of the
What is the potential value of
the business 10 years from now?
How strong are the company’s
Answers to these questions help
you avoid impulsive trading and maximise gains from stock markets.
Ask Big Picture Questions
There are reasons why you began investing. Your portfolio is a result of your investment objectives. Before making emotional investment decisions, ask these big picture questions:
Has my financial situation changed?
Is my portfolio aligned with my
Does it have enough
Is my investment horizon the same
as when it was in the beginning?
If answers to most of these
questions are in the affirmative, ask yourself why you need to make any
changes. These questions can help shift focus from short-term discomfort.
Your Investments Daily
An easy way to reduce the emotional impact of market volatility is to stop tracking your investments daily. Obsessively checking your investments during market volatility increases anxiety and makes you vulnerable to emotional investing.
In the past, stock markets have
handsomely rewarded those who remained committed to their investments amidst
volatility. Block noises and do not fall to rumours. By not tracking your
investments daily, you increase your chances of staying on course of goals.
Avoid Timing the
Time in the market is more essential than timing the market. Even the most seasoned investor cannot predict accurately when markets will go up and come down.
Also, remember that the
performance of the market is not the same as that of your personal portfolio.
Timing markets increases the chances of getting calls wrong, impinging on
crucial life goals.
Consult with a
Engage with a financial advisor to better understand your situation and buy more time. Expert advice can do wonders and help you see the big pictures. Financial advisors, who have years of experience, can help you navigate choppy waters with ease and ensure you do not indulge in impulsive trading or overestimate your risk tolerance.
It gives you the chance to
re-evaluate your approach to investing and better assess your risk appetite. It
helps you be logical and make rational investment decisions.
Focus Your Energy on Things Under Your Control
During market volatility, when things are topsy turvy, investors tend to focus on things beyond their control. However, the approach should be the opposite. You must focus on stuff that is under your control, such as:
Asset allocation strategy
Safety net adequacy
Markets will react as they are
supposed to during volatility. It is up to you not to get swayed by emotions
and make irrational decisions. Doing so can cause major heartburn.
Emotions can rob us of our thinking abilities and common sense. As an investor, it’s crucial for you to keep your emotions under control and not get deterred by short-term volatility. Stock markets are inherently volatile, and you need to adopt a prudent approach to be able to counter it. Understand your risk tolerance, and don’t allow emotions to cloud your judgement.