Why take the emotion out of investing?

Why take the emotion out of investing?

 

There are countless books, podcasts, documentaries and blogs on how to invest. However, one of the most overlooked skills is keeping your emotions in check when investing. Investment decisions should be based on information and all too often when we base our decisions on emotion (greed or fear) it can lead to less than ideal outcomes.

 

Making informed and intelligent investment decisions to start with, is one of the best ways to avoid emotional decisions. Listening to the family member at a barbecue that recommends a particular stock or investments can lead to uncertainty and fear when that asset does not perform as expected. However, having a structured plan from the beginning as to why you are buying a certain asset, the expected return, expected timeframe of holding on to it and exit strategy, helps avoid future poor decision making.

 

Jumping on the hottest asset that has been hyped in the media or around friendship circles is another way to question your investment decisions. Buying into these hypes, in order to avoid the fear of missing out, is a sure way to buy an asset at the top and be tempted to sell if there is a subsequent decline.

 

Investing on a regular basis (or otherwise called dollar cost averaging) is another approach to help reduce the risk during market declines. By investing equal amounts, on a regular basis means that during periods of market decline you are purchasing assets at lower and lower prices. In periods of market growth, it will mean that your previous holdings are increasing in value and providing capital growth. Having a plan that is irrespective of market conditions can help reduce the fear and have a very positive impact on your long-term wealth creation.

 

During periods of uncertainty (if history is anything to go by) removing the noise and staying the course is the most important method that you can deploy. This is much easier said than done and many investors are much too tempted to take the current loss to avoid future losses, resulting in selling out and missing the subsequent recovery. Have a professional adviser or support group to help ease your mind and provide an unbiased and objective point of view can help put your mind at ease and limit the likelihood of making a decision based on fear.

 

Making longer term investment decisions and accepting the fact that there will be fluctuations along the way can drastically reduce the anxiety of market fluctuations. It is far easier to predict that an asset will appreciate over a number of years rather than predicting its price in a week. By accepting this idea and tuning out the irrelevant information that will only impact prices in the short term you will be able to make smarter choices and avoid knee jerk reactions based on fear or heightened excitement.

 

Irrespective of whether the market is going up or down it is important to avoid making decisions on emotional optimism or pessimism and base decisions on research and information.