Let’s begin by talking about what emotional investing actually is before we try to avoid it. Emotional investing can manifest in a few different scenarios, but most commonly, it involves selling a lot at once or purchasing a lot. The kicker is that in order to really be emotional investing, you don’t do any previous homework. This can consist of investing because a company is trendy or turning around and selling all your stock when a company has a bad day. When you leave out all research and only pay attention to your gut, you’re bound to take a loss.
How to avoid it
Now that you know what emotional investing is and the dangers it proposes to your portfolio, you can do something about it. Below are some rules and advice in order to invest with your head and not your gut.
Knowledge is power. Doing your due diligence can help you in the long run. Now, you won’t be able to predict the market. Even if you read every book and listen to every expert. The truth is, no one can predict the market. People who claim to have all the answers have mostly had a stroke of good luck. Instead, do your homework on the market itself. Gain an understanding of how it works, why fluctuation normally happens, and what constitutes a reason to buy or sell. Even though you cannot predict the market, you can make informed decisions.
Hiring an expert to manage your portfolio for you is an easy way to take your emotions out of the game. By hiring a financial advisor, you’re putting your trust in them and their expertise. You’ll work with them to identify goals, discuss your overall risk tolerance, and plot how much you’re willing to invest over time. After that, you step back and let your advisor do they rest. You will still have an input, but you won’t have to make the decisions on your own anymore.
Have faith in the system
The market will always fluctuate. It’s the nature of the beast. The market has crashed before and will crash again, but it eventually recovers. Without taking the risk, you will never see the reward on the other side. It’s not always going to feel good to invest – especially when you lose money, but that’s how it should be. Just like you shouldn’t go shopping to make you feel better, you shouldn’t be investing (or selling stock) based on your mood and emotions.