How to Avoid Emotional Investing

For you to be a successful investor, you must be able to control your emotions and ensure that you are making the best decision at every point in time.

If we are all to be honest, we really would not be able to count how many times our emotions have come in the way of logical decision making. These emotions might have been borne out of past experiences, money, friendship, love, and so on. While our emotions are not entirely bad, the truth is that sometimes they do stand in the way of progress.

Just like many other facets of our lives, investing requires a lot of emotions as well; some are based on things like available information or risk, while others are seemingly baseless like intuition or investor expectation.

For you to be a successful investor, you must be able to control your emotions and ensure that you are making the best decision at every point in time. Here are some tips that would help you curb emotional investing:

Stick to your goals

This is the first rule of investing and it can never be over-emphasized. I would assume that at this point, you already have a detailed strategy of why you are investing, the investment vehicles you consider to be the best for you, your circle of competence, whether you want growth or dividends, and so on. If you haven’t, see earlier articles.

Having this in place would give you a level of confidence that you are not investing haphazardly and ultimately keep you at ease.

Control your expectation

Investor expectation is one of the biggest reasons for emotional investing. While it is normal to want the best out of your investment, it is important to remain within a base case or a downside case point. In other words, think closer to worst case scenario. This would help you deal with unfavourable outcomes better.

Control your risk exposure

Your risk exposure is very important as well. Through proper portfolio diversification and with the availability of good hedging systems, you can control how much risk you are exposed to. When diversifying, spread your funds amongst a number of industries so that one falling would be augmented by another.

If you can, try to diversify with securities that are negatively correlated so that a fall in one would mean a rise in the other and you would still maintain a safe average at all times.

Avoid immediate reaction

Information is great but it could make you react irrationally. The first thing you must know about the stock market is that nobody has perfect information. As such, most of it could as well be mere speculation.

News should give you information; it should not be used as a decision making tool – at least not in the interim. Just the same way we are advised to count to five before we speak when you are angry, take a breather before you make any decision. It would most likely be unnecessary.

No Sentiments

As hard as this might be to swallow, you have to drop all forms of sentiment when you invest. It is normal for people to have personal attachment to certain companies, industries, or securities in general.

It doesn’t profit you much to have investments in a friend’s company or your mother’s company when it is clearly underperforming. It also makes no sense to remain in an industry that is being swept away by new technological advancements because you love it.

The truth is when the industry crashes or your stocks fail, the emotion known as regret would be a harder pill to swallow.

Analysis are fallible

Believe me when I say nobody is a god when it comes to investing. Some people might have a better idea than others as a result of their long years in the game, but nothing is finite. Analysis are fallible. Past performance does not define future performance so it is important to keep an open mind at all times.

Do your research to serve as guide but do not depend on it for decisions. Rather, watch the market and ensure you are always within your mark. Long term strategies pay off better than probabilistic computations.

Know who you are

As much as possible, stick to you. Do not follow the crowd and do not attempt to take on risk levels you cannot handle. Your needs are completely different from those of another person and should not be compromised for the hope of something better.

At the end of the day, only you would suffer or benefit from your investment decision. So the next time your friend tells you about a new opportunity that doesn’t align with your plans, think twice about who you are as an investor. If it doesn’t align with you, walk away from it.

Written by Lawretta Egba.