Feelings make us human. The ability to feel happiness, sadness, remorse etc. is one of our greatest treasures. But these feelings might be causing havoc with your investment plan. No matter how intelligent an investor is when emotions take over all rational thought disappears and they start making completely wrong investment decisions.
Let’s try and understand how this great ability that makes you human, turns into a liability when you’re investing:
This is an emotional state where people are so worried about losing money that they refuse to take any sort of risk be it big or small. Their fear of loss overpowers any sort of happiness they might get by earning good returns. They convince themselves that they are happy with letting their money sit idle.
If you have too much fear you’ll never let your money grow. Instead of earning good returns, your money will lose value over time due to inflation.
This common but dangerous feeling occurs during a bull run. When the stock market is rising rapidly, they get greedy. They start pouring more & more money into the market, to take advantage of higher returns in the hopes of increasing their wealth quickly. They are more worried about missing out on a golden opportunity (FOMO or Fear of Missing Out), than an actual fear of loss.
Returns and risk go hand in hand. Higher returns mean higher risk. If you invest when the market is peaking the chances of losing money in correction are also high.
This happens during a bear run of the market. People start panicking when markets start falling. Feeling that all their hard-earned money will get lost, people start selling their investments. The main motivation in this approach is to protect whatever money they can by cashing out before the market falls any further. They fall victim of “Panic Selling”.
People in their panic forget that market undergoes different stages. If it is undergoing downturn right now, it will also rebound and have it’s upswing as well in future.
If you don’t wait for the rebound you’ll turn paper losses into actual losses.
Many people, who in the past have suffered losses in their investments, (most likely due to greed or panic selling), start avoiding investing completely. They are a perfect example of “once bitten, twice shy”. They avoid any further investments & forego any chance of earning good returns in the future by not investing their idle money at all, just because they have taken a vow to never get fooled again by the market.
Just because you lost money because of your erroneous & foolhardy ways in the past doesn’t mean you will always lose money. If you make informed decisions and think pragmatically you can certainly multiply your wealth.
These are just a few examples of what happens when feelings and investment plans get mixed. There are many more emotions which investors undergo during the market cycle, right from overconfidence and euphoria in the bull market, to desperation and depression in the bear market.
But there are some ways by which you can keep your feelings in check and enjoy the fulfillment of your financial goals. Let’s find out what they are :
- Write down your financial plan
Having a written plan can work more for you then keeping all the strategy in your head. You should have a properly documented financial plan in place, which includes all the whys and whats of your investment approach. When such a plan is in place you can use it as the reference guide before taking any investment decision. So when you see the market falling and start panicking, refer to the said plan and see if you have mentioned “Panic Selling” as a good approach for your investment? Hopefully not.
- Stop frequently checking your portfolio
Resist the urge of checking your portfolio after hearing any and every media news about rise or fall in the market. This will only tempt you to take unwanted actions. The biggest reason why investors don’t earn good returns despite all their well-laid long term plans is that they keep checking for changes in their portfolio frequently. This mentality changes them from long term investor to short term speculator. You should check your portfolio once or twice a year to see if everything is going as per plan. If you start doing it too much it will narrow your horizon from long-term to short-term. Investments are like trees growing from acorns – it takes time to bear fruits.
- Approach a financial advisor
If you are not able to keep your emotions at bay when it comes to your investments, it’s always advisable to hire a good financial advisor to help you. This advisor will help provide third party objectivity along with expertise and can help you make the right decisions. Just keep in mind that your advisor should have all the correct credentials and your best interest in mind. Just like a doctor, a good financial advisor/planner can keep your money healthy – as long as you give him/her proper information & don’t hide any facts.
So, it is clear that investment in itself is simple and easy. It is only when feelings get into the picture that it turns complex and difficult. But this does not mean that emotions have no place in your investment approach. Take your emotions into account before deciding where you are investing your money. After all your comfort level is as important as earning more money. Therefore if you are losing sleep because your portfolio is too risky, you should change the same and find the correct mix of risk and return in your portfolio, to sleep better.
How do you keep your emotions in check while investing? Let me know in the comments below.