How To Overcome Emotion As An Investor

emotional bag facesAs human beings, we have emotions that cannot be turned off. Whether you want them to exist or not, there’s no way to prevent emotions from surfacing. Emotions are for the most part, extremely useful tools that have helped humans survive for millions of years. Take fear for example – when something terrifies you or threatens your life, you want your body to enter a state you never thought possible. Super strength and lightening quick reflexes are welcomed responses at this point.

Emotions are WORTHLESS as an investor.

Before typing that statement I thought long and hard about its validity. In school, you’re taught that phrases like always and never are giveaways to a statement being false. Not often is something always or never true. In this case, it is.

Fear, excitement, joy, regret, etc. – all have no use to an investor. Why would these emotions matter? There are thousands or perhaps millions of people holding the same position as you. Some have profited, some have lost money and others have broken even. That means that some are happy, others are angry or sad and the rest are indifferent. Several different emotions and the stock can still move in one only direction.

Not Just People Invest Today

Introduce machines into the equation and emotions become even more irrelevant. Whether you like it or not, machines have become a significant force in the market. From advanced algorithms set up to scrape tenths of a penny to robust systems that can buy and sell millions of shares in a matter of nanoseconds, they all share one thing in common – the absence of emotion.

Cool, Calm and Collected

As an investor, you must be cool, calm and collected. The ability make rational decisions about what to buy and sell can become your most valuable tool. Emotion actually makes you weak and exposes you to judgments that would normally not make sense. If you absolutely know that a stock is oversold and will move upward soon, a drop in price lower than your purchase price can cause a gut reaction to sell.

So how do you avoid trading based on emotions? How do you prevent yourself from panicking when you’re fearful that you might lose a good chunk of your net worth? You have to learn to recognize your emotions and address them accordingly. That’s exactly what this infographic will help you do.

Think, Don’t Feel, Before Trading

By identifying your emotions and how they may impact your actions, you can apply rational thinking to your situation. For example, if the stock you own comes out with negative earnings and declines 4% as a result, stop and think before you hit that sell button. You obviously thought the stock was a good investment before declining in price, so evaluate the recent earnings announcement and determine whether or not OTHER investors are overreacting. Chances are, if you thought about selling immediately in an attempt to minimize your losses, others have done that exact same thing. I can’t count the number of times I’ve seen a stock take a huge haircut only to rally and regain much of its losses by the end of the day.

That’s not to say that you should never sell a stock if it’s up or down in a big way, just don’t make that decision based on joy or fear.

READERS: When did you overreact based on emotions only to regret your decision afterwards?

emotional investing infographic

Comments

    • says

      You are lucky indeed. Most people cannot remove emotions from the decision making that goes into investing.

      Maybe you’re onto something in regards to poker. I also played a ton of poker during my college days and the years after (I miss Party Poker). I was very excited to hear that Vegas and New Jersey have legalized online poker. I can’t wait for other states to sign agreements, allowing the same thing.

  1. says

    Very true information. I think that for those that are more apt to be emotional about investing can benefit from a trusted broker who can try to take some of the emotion out of the equation.

    I have been put to the test with my 401k rollover recently and the crazy gains in the market lately. I am slowly getting my money all back in and will be thrilled when I can “let it ride” to an extent since I have many more years to go before cashing out.
    Greg@Thriftgenuity recently posted…TV, the Great Time Waster – Reality TVMy Profile

  2. says

    I tend to stay away from emotion when investing, particularly in terms of taking excess risks. If anything, I’m more risk-averse. However, one can look at historical performances of different investment types, and allocate assets accordingly. That past data helps reduce uncertainty to some degree, thus minimizing emotions.
    Digital Personal Finance recently posted…Self-Discipline and Financial SuccessMy Profile

    • says

      Past performance will give you an idea of how risky the security is, but you never really know. Look at fixed income products recently. For decades, the prices would hardly move and in the last two months prices of many preferred securities and fixed income funds have dropped 20%.

    • says

      I love those order types because the remove the “decision” factor when trying to decide if you should buy or sell. Enter the order and leave the rest up to the machines.

  3. says

    I let emotion drive an investment decision once, and it was the only time I ever lost on an investment. I should have sold a stock when it was up and the signs were telling me it would go down in the future, but I liked the company and held on until I had a loss.

    Lesson learned.
    Eric recently posted…June 2013 Net Worth and Earnings UpdateMy Profile

    • says

      Unfortunately, I can relate Eric. To me, there’s nothing more frustrating than losing money on an invest when you were in the green at some point. I like to set stop orders or trailing stop orders to lock in some gains.

  4. says

    The sentiment circle is great. Somewhere I saw a similar cartoon about people listening to some rumor which turns into a buy rush and as it goes on some hears some saying something almost unrelated to stock, but it turns the buying into panic selling and then the circle repeats. It is pretty much how it works out there. Same as with dividend stocks these days. Now they are under selling pressure, because “some investors” are worried that FED would raise interest rates. I wonder, why they are dumping dividend stocks now, when nothing like that is happening. Why they don’t do it when it really happens? I do not get it.
    Martin recently posted…My inspiration in the last week #24My Profile

    • says

      You can see the same type of movement when looking at securities who’s symbols are confusing. For example, several years ago, major news came out about Intel (INTC) and the stock Intl Fcstone Inc (INTL) reacted drastically simply because people thought INTL was the symbol for Intel.

      I’ve seen many preferred securities take huge hits in the last few months. Sure, interest rates are going to start rising, but we’re not going to see huge bumps. We’ll likely see 0.25 – 0.50% increases every six months for many years.

      • says

        That’s a good one. I haven’t experienced anything like that, but I believe it. Many people investing out there are totally dumb and not knowing what they were doing. I experienced Visa taking hit because of credit crunch, which was however totally unrelated to them. Same is with Realty Income which is a totally different REIT and yet it was dumped along with MBS REITs.

    • says

      I’m impossible not to get excited when you have a large gain or feel some type of remorse when you’ve lost, but you should not let those feelings affect your investment decisions. If you think a company is very solid and their fundamentals look great, don’t panic and sell just because others are doing the same. A current example would be Facebook. Thousands of investors bought the stock near $40 when it started trading. Since then, it dropped to the teens and now it’s back up to $38. If you didn’t panic and sell, you would be even right now.

  5. says

    This is why my husband handles our investment decisions. While we talk about everything I trust his judgment on investments because he can remove the emotion from the decision. I can’t. I’m always thinking what it will mean to our girls if we make the wrong decision. He doesn’t leave me out of the decisions…I just listen more than I talk.
    Betsy / CollegeMom recently posted…How to can strawberry jamMy Profile

  6. Source says

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  7. says

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