Emotions are a highly valuable asset in people’s lives, but fails to remain so, and becomes a liability when it comes to investing.
25% of traders and investors say- Automate your investments, crunch the available data, do your research, and earn profitable returns.
Others, the majority 75% of traders and investors – Surrender to your emotions while fighting tooth and nail for better returns.
As humans, we always tend to be risk-averse and look out for certainty of returns. Living in today’s hyper-connected world where media is so readily accessible, people fall prey to bias, irrational investing, herd mentality, and emotions like fear, panic, remorse or greed, thereby negatively affecting their returns. Conversely, emotions like ‘FOMO’ or overconfidence can also be counterproductive to positive investing returns.
Simply put forth, emotional investing refers to investment decisions driven by emotions, making it difficult to stay on the track of long-term financial goals. Emotional biases can be hard to manage as they derive from impulse rather than miscalculation or interpretation of information. Therefore, in this article, we will be laying down five simple tricks to help our readers stop emotional investing and take up the path of judgemental investing.
1- Look at the bigger picture
Every investor has a goal to achieve that made them start investing, helping them in better portfolio construction. Revisit these goals, both when the volatility picks up or moves down to track the changes and make healthy decisions. Some questions to ask yourself are:
- Is my investment time horizon the same as it was when we built my portfolio?
- Is my financial situation the same?
- Is my portfolio aligned with my risk tolerance?
These answers will help you analyse the markets better, keeping inline your goals and objectives. These questions can help investors to shift their focus away from the short-term discomforts and see the big picture.
2- Do your research
We always advise investors not to follow the herd mentality and blindly listen to the advice given by other traders/investors. Every Investors Iinvestors needs to carry out their analysis before making an investing decision. No forecaster can accurately predict the market reactions. These sensational headlines are a major reason for heightened anxiety and emotional reactions, making retail investors forget their short-term goals. Remember, the performance of any one market is not the same as the performance of your portfolio. So, take everything you watch and read with a grain of salt.
3- Do not check your investments daily
Until and unless you are a regular trader who has more short-term goals, it is advised not to go through your investment portfolio daily. This act of investors adds to their stress and anxiety as the market moves up or down, thereby, forcing them to make uninformed decisions. History has been an earmark that long term returns have mostly been positive for most of the investors. By not checking your portfolio balance each day, you increase the odds of staying the course and seeing the benefits of that approach over the long term.
4- Diversify Your Portfolio
Heavy goes the old saying, “Do not put all your eggs in one basket.” Imagine what if you had invested 100% of your life savings in Enron back in the early 2000s. Well, you’d have been completely shattered as the company went bankrupt. Therefore, to minimise the risk of losses from a particular asset, spread your money among many different asset classes and different assets within each asset class. The percentage you aim to invest in each asset class, and each type of asset, within each class, is called your asset allocation, which doesn’t remain the same over time.
Your ideal asset allocation needs to be changed and updated regularly to stay abreast with the market scenarios. This mechanism for reverting to your target asset allocation is known as rebalancing the portfolio.
5- Follow the Dollar-cost averaging strategy
This strategy is known as one of the most effective strategies to overcome emotional investing. Here, equal amounts of dollars are invested at regular, predetermined intervals, irrespective of the given market conditions. During downturns, an investor is purchasing shares at a lower price. During an upward trend, the shares previously held in the portfolio are producing capital gains. Since the dollar investment is a fixed amount, comparatively fewer shares are purchased when the share price is higher. This strategy helps an investor to stay in the course of investing.
As professionals, we seldom advise our investors to not to tamper with this set strategy until a major change warrants revisiting and rebalancing the established course.
The Bottom Line
Investing without emotion is easier said than done. As mentioned above, some of these important considerations can keep an individual investor from chasing futile gains or overselling in panic. During the times of market uncertainty, be more careful to avoid emotion-fuelled investing and making decisions based on a proper financial analysis of the asset. It is crucial to stay focused on the fundamentals and not let the panic or overconfidence blind you for making hasty decisions. All your decisions must be based out on your time horizon and risk tolerance capacity. Understanding these two factors is an important basis for rational decision-making.
Warren Buffet very aptly mentioned, “Be fearful when others are greedy, and greedy when others are fearful.” Understand that when a piece of information is publicly available, and every investor is running helter-skelter in the chase of that particular asset, prices are sure to boil over, and it is during this time when an investor should become more cautious while paying for an asset. However, But at the same time, on the contrary, when every other investor in the market is fearful about the conditions, it is your opportunity to do your research and trust in your analysis to present a good value buying.