Why Emotions Have No Place in Investing
Investing may appear straightforward, yet emotions – powerful and unpredictable – often hijack this space, leading to decisions fuelled by fear, greed, and hope rather than logic and strategy. While emotions serve us well in navigating daily life, in the realm of investing, they can become our worst enemies.
My clients are mostly not what’s known as ‘sophisticated investors’. That is my client base. My target market. And, I am proud to help them. I guess most would call these types of investors ‘mum and dad’ investors. Everyday Kiwis. Salt of the earth.
What comes with that type of client base though, can be a world of worry (or emotion), when markets decide to do what markets do, and either get some volatility thrown in there, or we see big drops in value. Cue: Freak out mode! 😊
Seriously though – I get it! No one likes to see their wealth fluctuate in value. Even seasoned and experienced investors. So, the role when the tough times hit is to strongly encourage these ones to stay the course, and that what they are experiencing, and seeing in the markets, is 100% completely normal.
I encourage them to live the old adage: “If in doubt, zoom out”. Look back in time and see the untold amounts of times we’ve had market dips, even violent ones (except those every 7-10 years). Guess what? They bounce back. They always have. Think about things logically. Why do I say this? Well, it’s a very common trait to believe that when markets take big dips, they will continue to dip, and that their funds will drop to zero and never-ever recover!
If you stop and think that reasoning through, you will quickly see that it’s a very incorrect approach. Essentially what you’re saying is that all markets are disappearing, that the fund managers have selected all assets that are failing and dying, and that all financial advisers and money managers will no longer exist. Really, if you play this reasoning out, it’s farcical.
If funds truly are to go to zero, this would mean we’ve experienced a worldwide catastrophic event that has destroyed all markets – i.e. Armageddon!
See How Emotions Getting Involved In Investing Is A Dangerous Game?
Let’s explore why emotions are detrimental to sound investment decisions and equip ourselves with strategies to keep them at bay.
Why Emotions Are Kryptonite to Investment Success
- Fear: News headlines scream “Market Crash!” and suddenly, your carefully assembled portfolio feels less like a secure nest egg and more like a ticking time bomb. Fear, disguised as prudence, prompts knee-jerk reactions – selling out of investments at market lows, locking in losses and missing out on potential recoveries. Even the term ‘recession’ in the press can strike fear in investors. Yet, this is often the catalyst for the pivot before the upswing.
- Greed: FOMO (fear of missing out) rears its ugly head as you witness others seemingly striking it rich in hot new sectors. Greed whispers sweet nothings, urging you to abandon your diversified portfolio and chase volatile, high-risk opportunities, potentially exposing yourself to devastating losses.
- Hope: “This stock is bound to rebound!” you tell yourself, clinging to optimism despite mounting evidence to the contrary. Hope, masquerading as confidence, keeps you irrationally attached to underperforming investments, hindering your ability to reallocate funds elsewhere.
These are just a few examples of how emotions can cloud judgment, leading to impulsive decisions that derail your long-term financial goals. The stock market, inherently volatile, throws curveballs constantly, and succumbing to emotional reactions only amplifies the inherent risks.
Building Emotional Firewalls:
So, how do we keep these emotional saboteurs in check? Here are a few key strategies:
- Know Yourself: Recognize your emotional triggers. Do you panic sell during downturns? Are you susceptible to FOMO-driven investments? Self-awareness is the first step towards mitigating emotional influence.
- Establish a Plan and Stick to It: Define your investment goals, risk tolerance, and time horizon. Create a diversified portfolio aligned with your plan and resist the urge to deviate based on emotional whims. This is where a close relationship to an investment adviser is essential (see below). You’re now putting some context to your investing, and that doesn’t involve emotion or ‘timing the market’.
- Tune Out the Noise: Don’t get bogged down by daily market fluctuations or sensationalized news. Focus on long-term trends and your established investment strategy. Stop making decisions based on what news headlines are saying. Focus instead on what the experts are doing and saying.
- Automate: Set up automatic investments and rebalancing schedules to remove emotions from the equation altogether. For a lot of my clients, we call this the ‘LifeCycle’ strategy.
- Seek Professional Guidance: A financial adviser can provide objective advice, help you stay disciplined, and offer invaluable support during emotionally charged periods.
Remember, emotions are not the enemy. They are simply human. The key is to acknowledge their presence, understand their potential pitfalls, and implement strategies to ensure they don’t derail your investment journey. By prioritizing logic, planning, and discipline, you can tame the emotional rollercoaster and navigate the markets with a clear head and a focused vision towards your financial goals.
Words of Caution:
This article is for informational purposes only and should not be considered financial advice. Please consult with a qualified financial adviser before making any investment decisions.
I hope this helps!
Daniel Carney
Financial Adviser
Goodlife Financial Advice