Emotions and relationships go hand in hand. Feelings drive a couple’s purpose and success; without those emotions, the relationship is bound to fail.
But when it comes to investments, it’s the exact opposite. If you tie money and emotions together, you’re doomed. You’re bound to fail as an investor.
Emotion: An ingredient for half-baked investments
The best instance of emotional investment is seen in stock trading. For example, say your uncle is a regular investor in the stock market. That might sound impressive, but he hasn’t always made profits. In fact, it’s just the opposite. He has made lots of bad investments in the past and incurred heavy losses as a result. Still, he can’t stop himself from investing in the stock market.
It’s like a game you can’t quit – an addiction and thrilling adventure all rolled into one experience. Even though it’s risky, your uncle keeps investing in the stock market because he doesn’t want to miss out on that excitement factor. His need to take part in investing based off the adrenaline rush is just part of his overly-emotional investing strategy.
Often, he buys stocks of the companies that he likes. You can even say he is emotionally attached to that company. However, when you look at the company in a practical sense, you can see that it’s no blue-chip company. Despite that, my uncle buys the stock all the same and hopes its price will increase in the future. Sometimes, it does. But, most of the time, his hopes are destroyed.
Recently, my uncle bought stocks of a company for $3,200. He expected that the stock value would increase in the coming months, but it didn’t happen. When the stock value dropped to $1,200, he consoled himself and hoped that the price would climb. That didn’t happen either. So, in the end, all he was left with was emotional regrets instead of financial gains.
He felt embarrassed, but it was his mistake. He was too focused on his personal opinion and ignored all the warning signs. If he had done his research, he would have found that the company’s annual report was not promising. More than that, the CEO was going to resign, and a rival company was ready to launch a better product on the market. Overall, his emotional involvement with the company cost him the opportunity to make a profit elsewhere.
Don’t invest emotions in investments
Why are you investing in the stock market or a commodity market? The simple answer is ‘for profits’. And, when it comes to money or profits, you must be rational.
Most investors get scared when the stock market crashes. They sell their stocks rapidly, fearing that they’ll lose all the money they’ve put into it. It’s normal to be scared. But take a breath and re-valuate – is this really the right time to sell off all your stocks? Market crises and volatility are the perfect moments to stand back and take everything in. Instead of following the herd that’s desperate to withdraw and hoard, you can contribute to the market’s turning point. You could even see this as the golden chance to buy the stocks of blue-chip companies. After all, when else will you have the opportunity to buy up all the offered stocks at such a low price?
Remember, the stock market is bound to recover after some time as it is directly connected with the nation’s economy. The regulatory bodies will take steps to put the stock market on the path to recovery mode. When that happens, you’ll find yourself in a profitable position because you thought objectively.
However, fear and personal attachment aren’t the only emotions to look out for – they’re just the easiest to identify. Be wary of other overly involved feelings like greed or impatience. The overall goal is that you approach each investment with an analytical mind and a purpose.
A seasoned investor uses their brain instead of their heart when dealing with money. It’s challenging to keep emotions out of investments, but you have to do it if you wish to reap profits. Don’t invest just because it’s your hobby to analyze problems or you have too much free time. Use the money for a better purpose.
If you think you’ve got the right head on your shoulders, it might be time for you to step into the world of investments. However, emotions aren’t the only obstacle when it comes to building a portfolio. It’s wise to seek out a financial planner at the start and even throughout your journey. They can help you find the right strategy by reviewing your personal situation, including your risk tolerance and potential investment asset allocation.