DROP YOUR EMOTIONS, START INVESTING

It is important to arm yourself with the knowledge to get out of the emotional investing trap and to know that there is never a perfect time to invest.

Just the other day as I was watching TV, I listened to the story of a 13 year old prodigy who started writing programming codes from age 6 and how Google, the famous American multinational tech giant paid huge sums to hire him. As I listened with keen interest I made up my mind that my kids would be registered into coding classes. Now here is the challenge, my kids may never have interest in mathematical codes, but because I already have a biased mind towards enrolling them for coding classes, I am gearing towards making an emotional investment. This is similar to making investments where you allow present emotions affect your present or future logical decisions.

This relates to the stock market, how investors get so passionate about their investments allowing emotional extremes trigger irrational decisions that eventually cost them money. The truth is that investing itself is difficult in today’s society. This is because one minute, there is exciting and inspiring news all over television, and then the next hour you are tuning in to hear shocking and discouraging news. You know what this does? It allows emotional fear creep into the investor therby leading to emotional investing. A typical new investor is putting his hard-earned cash on the line hoping for a positive gain and no losses, so hearing disheartening news leaves one weary.

Making emotional investments is not limited to new investors alone, infact this applies to all professionals who allow the trauma associated with one financial loss cause them to hold on to weak stocks. We all know the market is volatile, but how does one prevent emotional investing?

There are a few strategies to curb emotional investing, one of which is the dollar cost averaging which has been around for many generations. This is a systematic approach that enables you invest a fixed amount of money at predetermined intervals which slowly builds up your total holdings. It also means that instead of investing with huge lump sums, the investor can work his way into a position by slowly buying smaller amounts over a longer period of time.

To illustrate this further, I would use myself to explain this strategy. I have N 1,000,000 to invest in ABCD company and today is 1st January. So I have two options, first I can drop the huge sum of 1 million at once, walk away and forget about it for a while, or I can set up a dollar cost averaging plan and opt to invest in bits. Here is what I would do. I will split the 1 million naira into 4 places with more money placed when the price is cheaper to acquire more units and less funds placed when the stock price is higher.

Below is a breakdown of the stock prices:

Month 1 - N50 per share (50/300,000) =6,000 units

Month 4 - N70 per share (70/250,000) =3,571 units

Month 8 - N75 per share (75/250,000) =3,333 units

Month 12 - N120 per share (120/200,000) =1,666 units

Regardless of how many shares I purchased each quarter, the total number of shares I was able to acquire over one year was 14,570 units and the average price paid for each of these shares is N71.49 taking into cognizance the current price of N120. This means that my original investment of 1million has turned into N1,748,400, which is a sweet profit of N748,400 for one year. Here is how I calculated it (14,570 units multiplied by current price of N120).

As an investor, it is important to arm yourself with the knowledge to get out of the emotional investing trap and to know that there is never a perfect time to invest. If the market is up, you feel things are too expensive, and when the market is down, you will feel it may never turn. If you can take emotions out of the picture, invest strategically, you will come out tops.