How to avoid emotional investing

What is emotional investing? Despite the name it has nothing to do with self betterment techniques or improving how you deal with your emotions, sort of. Emotional investing refers to the act, or habit, of making decisions based on emotions, rather than on “rational” analysis of data. This approach to investing is very common, it’s not a bad thing per se, as it can have both positive and negative effects on a person’s portfolio. Any emotion can lead you during your decision: fear, greed, hope and even rage. “Controlling your emotions” is a broad term that I personally don’t like, emotions are just that, emotions. Learning how to put them in context and how to harness them while remaining a sensitive and open minded person should be one of your priorities, rather than working on how to suppress every thought that comes to your mind.

Emotions are a fundamental part of what makes us human, there is no running away from that, but when it comes to investing it might create issues for your portfolios. What we can do to tackle this is to analyse bit by bit the concept of emotional investing, its effect on people and to find strategies we can use to mitigate its negative effects.

Let’s take a look at the ways your emotions might hinder your financial goals:

1. Impulsive decision-making

Which is, you might have guessed it, means buying and selling assets without taking your time to have a thorough analysis of the data that is available to you, and not considering the long-term effects and consequences these actions can have on your portfolio, and wallet.

2. Overreaction to market events

You wake up, have your coffee and then open your investment apps only to find out the market has suddenly dropped while you were sleeping. Bolting from the toilet and running to your laptop to panic sell or buy might, surprisingly i know, not be the best decision.

3. Cognitive biases

Confirmation bias being one of them, you believe company X will do well as its a “safe” option and has been safe for years, so you seek out information and only talk to people who will confirm your pre-existing beliefs. Anchoring bias, on the other hand, is something that happens when you “anchor” yourself on the initial information you’ve received, maybe when you were just getting started in finance, and ultimately never update your choices.

4. Missing out on opportunities

Fear might push you away from good opportunities, a market downturn might make you waste good stock while clinging to them and waiting for the market to recover would have been the easier option.

How to avoid this? Let’s look at 6 ways to avoid falling in an emotional trap

1. Set goals and stick to them

Create a plan, as good as you can, and set realistic goals. What’s your risk tolerance? Where are you planning to allocate your assets? It might be difficult to do so if you’re just getting started in investing, but the internet and asking people you trust and look up to can be a precious source of information.

2. Do your research

Quite obviously I know, investing requires a huge amount of research. Analysing financial statements, understanding what you’re risking and what gains you could make from betting your money on stock. Study, reach out to people, go back to university or enroll in online courses! There are infinite sources of information to pick from, and once you feel like you have a solid understanding of the whole thing, you’ll be less likely to make impulsive decisions.

3. Avoid herd mentality

Following a crowd can have mixed results, but just because everyone and their mother is investing in a particular stock, it doesn’t mean you should too. If Elon jumped from a bridge would you jump too? Maybe, but try to stick to your plan first.

4. Don’t let fear or greed drive your decisions

The market goes up and you try to make the best out of it, when it goes down panic selling lead by fear might push you to sell your investment at a loss. Recognise these emotions, it’s important to learn to know how to harness them and not to let them dictate your investment decisions. If you find yourself becoming too emotionally invested in your investments, take a step back and reevaluate your strategy.

To wrap it up, investing your money based on emotions can be a dangerous trap that can make or break even the best-laid investment plan by the most experienced investor. Fear, greed or following the wrong meme trend in investing can lead us to take impulsive decisions. Try to keep in mind that investing is a marathon, not a sprint, and marathons need a long preparation and a proper training not to leave you limping.