Human beings are emotional creatures. As much as we try to be rational, logical, and reasonable, emotion will always come into play in our lives at some point. So, when I advise my clients to take all emotion out of their investing, I know that is easier said than done. Even I have felt doubt and fear at times when an investment did not seem to be panning out for me. Luckily, my wife has been a great sounding board for me in those times, and she reminded me that investments go up and down and that we should stick with our long-term plan. As it turned out, she was right. She reminded me of the importance in taking the emotion out of my investment. Here are some common emotions that come into play in our investing and how they can make effective investing more difficult.
It may surprise you to know that love is involved in investing. I have seen many clients reluctant to sell a company's stock simply because it was passed on to them from a loved one. Or, perhaps, they were a former employee at that company. Or, for some reason, they were very excited about the stock when they bought it but don't want to admit that the stock didn't skyrocket like they had hoped. For various reasons, sometimes people just love a particular stock. Unfortunately, you can love a stock but that stock is never going to love you back. That may sound harsh, but we need to realize that any emotional attachment we have to stocks will simply hold us back when we may legitimately need to sell them.
It is pretty easy to see how fear may creep into our investment decisions. You work hard, save your money, and want to see it grow into your retirement nest egg. Occasionally, however, there is downturn in the markets and we may be afraid of what those downturns can do to our portfolios. When fear dominates our reasoning, we are more likely to take on less risk than is optimal.
Greed is really the opposite emotion of fear in investing. Typically, we may feel greed when the markets are hot, when it seems like everything is going up and there is no end to the good times (remember 2007?). Just as fear can cause us to take on less than optimal risk, when greed dominates our reasoning, we are more likely to take on more risk than is optimal.
Warren Buffet has said, "It's not greed that drives the world, but envy." If you talk about investing with your friends, you may feel like they are doing much better than you at times. Or, you may read about someone through social media or in an article who has been highly successful in investing (I did just use a Warren Buffett quote). You may be a little jealous or feel like you missed out on an opportunity that made them a lot of money. The problem with this is that it can push you to take risks that you would not otherwise take. It's important to stay grounded and focused on your own investing strategies and successes. Trying to keep up with the Buffetts will just be ineffective and frustrating.
Personally, I like to generate and maintain positive emotions like hope as much as possible. Of course, being hopeful won't prevent a market downturn from happening. But, I think hope can help us feel confident in our investment decisions. Confidence is important, particularly when you have done your homework and settled on a sound investment plan. Confidence in that plan can help you sleep at night.
When it comes to investing, it is important to put emotions in perspective. One strategy for doing this is to consider doing the opposite. For example, if you find yourself in love with a stock, force yourself to consider reasons why you should dislike it. Find a balanced opinion and that's where you will have a more neutral, informed perspective in any investing decisions you make regarding that stock. Likewise, if you find yourself feeling fearful in a market downturn, reflect on the possibility that it may just be the right time to take advantage of lower prices in the market and buy. When you feel some envy creeping into your thoughts, contemplate your investment successes and analyze your investing strategy. Focus on finding contentment with your long-term plan.
I know we all have to work at keeping our emotions out of investing. I am happy to be your sounding board and talk about any emotions you may be feeling about your portfolio. As long as you have outlined your long-term goals, developed your investing strategy, and diversified your portfolio, you are on the right track to successful investing.
If you have any questions about investing or are wondering how you can get started, I would be happy to meet with you for a no-cost consultation. You can e-mail me at email@example.com
or call (928) 225-2474
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