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Don’t Let Emotions Rule Your Investing Decisions

23 March 2016 in Investing 101

Key Takeaways

  • Buying low and selling high is nearly impossible if you let your emotions control how you invest. Create structure around your trading process.
  • Don’t underestimate the effects of emotions. Market downturns have been known to increase hospitalization rates when emotions run high!
  • Utilize an investment checklist, write down your financial goals, and use different trading types to help stay grounded.

Think about a time when you made an investing decision that you later regretted. There are probably a few that come to mind. What caused you to react the way you did? Perhaps a lack of knowledge, bad timing, or letting your emotions run amok.

When the markets are volatile, investors can be at their most vulnerable. Emotion such as fear, panic, capitulation, and depression start to surface. If you feel this way, you’re certainly not alone. By taking control, however, you can prevent your emotions from affecting your investing decisions. Are you ready to stop being your own worst enemy?

Look Up And To The Horizon

People tend to make emotional decisions when things don’t go as planned. It’s natural to want to act on excitement or discomfort as quickly as possible. Making haste might seem like the right thing to do, but if you forego rational decision-making in the process, the results could wind up far less than optimal.

For example, instead of rushing to liquidate all of your investments as you watch the markets tick lower, press the pause button. Think about your long-term investment strategy. Is selling low in a panic part of your plan? Unlikely.

Understand The Cycle Of Investor Emotions In Order To Beat It

Why is it that time and time again, many investors fail to follow the golden rule: buy low sell high. Here’s why it’s easier said than done.

Don't Let Emotions Rule Your Investing Decisions

Source: Transamerica

Rising markets are exhilarating and euphoric. Experiencing those types of emotions can lead investors to feel overconfident, however. Many investors start to believe they’re better than they actually are, that things will continue going up, and that they need a bigger piece of the action.

Overconfidence thus leads many investors to eagerly invest more and more money into the market. As a result, studies show that market highs typically see the most inflows.

It’s no surprise that emotions start to change as the stock market goes into decline. Feelings of nervousness and denial start to emerge. The temptation to sell usually isn’t too h3 at this stage yet because many investors do not want to admit they bought at the peak. But if prices drop even further, desperation, panic, and defeat arise. At this point, emotional investors tend to pull their money out, thereby selling low, and hold onto it as cash.

There’s an old saying, “Bulls make money. Bears make money. Pigs get slaughtered.” Pigs are emotional investors who confuse the market with their own investing prowess.

Write Down Your Investment Goals And Utilize A Checklist

Writing down your investment goals can have a greater positive affect to avoiding mishaps than you may think. Use budgeting as an example. It’s much easier to stick to a budget that you’ve actually crunched the numbers for versus one that’s only a vague idea in your head.

With investing, setting clear objectives like knowing exactly how much you want to save and invest each month, choosing an investment style, and coming up with specific long-term savings targets is much more effective than thinking in generalized terms. Having detailed goals you can reference during times when you start to feel vulnerable can help you stay on track and put your emotions aside.

Utilizing an investment checklist is a smart way to trade and can help you avoid making emotionally based trades. Creating your own investing checklist is a great way to develop a systematic, organized, and thorough approach to trading. Not only does this prevent you from making rash decisions, it can help you learn how to make informed trades. It can also make it easier for you to determine when to buy, hold, sell, and reallocate into new investment opportunities.

Gain More Control Of Your Trades By Using Different Order Types

Instead of placing all of your trades at market, consider using different order types  to help gain more control of your execution prices. Some examples of various trading types that investors like to utilize include stop orders, limit orders and stop limit orders.

Stop orders let you set a stop price – above the current price for buys or below the current price for sells – that if reached will triggered your order at market.

Limit orders enable investors to purchase or sell a stock at a specific price – the limit price – or better.

Stop limit orders are a combination of stop orders and limit orders, offering investors added precision.

The more analytical and methodical you are when you trade, the better. Greater control can help you avoid emotional trading.

Dollar Cost Averaging

There are also many benefits of dollar cost averaging, an investment method that involves investing a fixed amount of money in an asset on a consistent basis over time. In addition to helping keep emotions out of the equation, dollar cost averaging can help inexperienced investors who are generally hesitant about entering the market or who would otherwise choose not to invest at all.

For example, you could initiate a DCA trading strategy to ensure you consistently invest $1,000 at the start of each month into Stock A during difficult markets for a set period. Depending on the price of Stock A from one month to the next, the number of shares each $1,000 injection can purchase will vary.

Dollar Cost Averaging

Stay Healthy. Don’t Let The Markets Put You In The Hospital.

Believe it or not, negative emotions about the stock market can have an affect on your physical health. If you get ill, health care costs can get uncomfortably expensive, which can create even more added financial stress when the stock market isn’t going your way.

A study by two professors, Joseph Engelberg and Christopher Parsons, at the University of California at San Diego (UCSD) actually found a link between falling stock markets and rising hospital admissions for panic attacks and anxiety.

Did you know that California alone experiences about 3,700 market-related hospitalizations a year? In addition, Engelberg and Parons found that a one-day drop in equities of about 1.5 percent leads to an average 0.26 percent increase in hospital admissions over the next two days.1

The American Journal of Cardiology also found a rise in the number of heart attacks during the 2008-2009 financial crisis.2 Be careful not to be so short-term focused about declines in your portfolio that you worry yourself sick.

Trade Smarter

Are you ready to check your emotions at the door and make smarter investing decisions? Put your money to work with Motif Investing.

Place trade orders at market, or use buy limit, sell limit, sell stop, and sell stop limit orders. Opening an account is free and fast. Get started today.

  1. Engelberg, Joseph, Christopher Parsons, “Worrying About The Stock Market: Evidence From Hospital Admissions,” UCSD, October 2014.
  2. Transamerica staff, “Investment Advice: Avoid Emotional Investing,” Transamerica, 2016.
  1. Brian
    24 Mar at 1:23 pm

    That’s interesting that hospital admission rates go up when the markets are bad. I know losing money in stocks can be super stressful if you let it get to you. The more I learn about investing the better I’ve become at managing my emotions but it still takes effort.

    Reply

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