Hiya guys! I am SO delighted to share with everyone TFG’s first ever guest post about emotions and investing from SB @ ONECENTATATIME.COM! SB is an informed husband and father with dexterity for investing and passion for finance. His blog has over 5,000 subscribers and an impressive repertoire for those interested in making money, savings, investing, and family. It’s a total dance party @ onecentatatime.com 🙂
As per an old proverb, making money by investing the stock market is rather simple as you just need to buy low and sell high. Sadly enough, majority of the investors do the opposite, they buy high and sell low and as a result, pay dearly for it. By now, all investment enthusiasts must have encountered a post which articulates the dangers of market timing.
Market timing is the attempt that you put forward to earn profit from an investment during a specific moment before the price suddenly starts fluctuating.
As per a research by Morningstar, over the past 10 years, investor returns have been lagging behind fund returns for the asset classes which were taken into consideration.
The research also reveals the big role which emotion plays into investing. Whenever the stock market is bullish in nature, investors get greedy and they look jealously at the previous returns which stocks have produced off late.
Due to increased fear, anger and jealousy, they sell off their investments even after they’ve lost bigger portions of the value. This leads to permanent losses which are impossible to recover from.
Rule your emotions – Separate yourself from your feelings
Most people are of the opinion that as long as investing is concerned, the best step to do is to take an unbiased, rational point of view which has no place for feelings and emotions. But is this true? Or are there advantages of giving in to the emotional urges even when the logical viewpoint is the opposite?
It is possible to maintain distance with your feelings when you play the role of an investor.
Little bit of over-certainty
A growing body of researchers show that even if you feel you’re keeping aside your feelings when you’re being an investor, you are actually not doing so.
When you think that you’re an above-average investor, this can also lead to lack of required diversification in investment portfolios. You may also start believing in the illusion that you don’t make bad investments which is definitely an illusion that will probably be shattered in no time.
Holding on too long is not always recommended
With regards to love, ‘holding on’ can be the best thing but this is not the same with investing. Majority of the investors refuse to sell an asset unless they’re assured that they will get back much more than what they paid for. This also clearly implies that they keep holding on to loser bonds and stocks for a longer time.
You should instead try not to focus on how much you had paid for that investment. If you think you would never buy it again even if you get a chance, it’s the right time to sell off.
Be aware of spin
The way something is presented is called ‘spin’ and in this field, people can be easily manipulated by how data is demonstrated to them. For instance, if you’re given a choice between a fund which tends to lose money 1 year out of 10 and another which gains 9 years out of 10, people will tend to choose the latter but in actuality both are similar!
Overload of information
While there are some people who usually do a little bit of diligent research that is needed, like talking to experts and online research, there are some others who spend more time in thinking of the flavor of the ice-cream they want, rather than choosing bonds they like to invest in.
In case you’re confident about your capability to choose the right investments, you might get lost with available numerous options. When you have more than one option to choose from, it’s required that you study further and apply some sort of predictive logic. It’s important that you keep your personal emotions aside.
So, now that you know how much necessary it is for you to subtract your emotions while investing, don’t indulge in emotional investment ever if you don’t want to pay you back dearly.