Fear and greed can influence the choices people make, especially when it comes to money. These emotions can affect investing decisions, and sometimes leading to actions that you might regret.
Learn how fear and greed can affect you as an investor and how you can keep these emotions in check. Read on below.
How fear and greed influence the markets
Fear can keep you from taking risks with your money. This isn’t always a bad thing, since a certain amount of fear can prompt you to manage risks and find ways to protect your portfolio.
However, if excessive fear takes over completely, you may end up overreacting to changes in the markets. For example, when there’s bad news affecting your investment, you may be tempted to sell right away.
You might react without properly assessing the situation and thinking of long-term prospects instead.
When fear spreads, many investors may sell in a panic, causing prices to fall quickly and leading to a market crash.
On the other hand, when things are going well, investors can become prone to greed. An example of greed in the markets is when investment bubbles happen.
Bubbles tend to form when investors think prices will keep going up forever. People buy assets at high prices or hold onto winning investments hoping for the upward trend to continue.
Eventually, bubbles burst, and prices decline sharply when there’s no solid reason for them to keep rising. Investors will start to take profit as fear sets in.
Greed can also cause people to invest more money than they can afford to lose or invest in things they don’t fully understand simply because they want to make a big profit quickly.
Keeping fear and greed in check
Staying rational is the key to not acting on emotions, but it’s easier said than done when your hard-earned money is on the line. Here are a few steps you can take to keep a clear head when investing.
1. Stick to your plan
It’s crucial to have clear investing goals and a sound strategy so you can stay grounded amid uncertainty. Instead of acting on emotions, you can make choices based on how well the options fit your strategy and whether they align with your goals.
2. Ignore the noise
Social media and 24-hour news cycles tend to fuel investors’ fear of missing out and create a false sense of urgency to act on the latest developments.
Give yourself time to process the news and filter out unnecessary information to avoid getting swept up by the sentiment of others.
3. Set realistic goals
Greed can result from a desire for extremely high returns, which are often unrealistic. It helps to think of investing as a means to build wealth gradually instead of a get-rich-quick scheme.
With this in mind, you can set specific and achievable targets for your investments and free yourself from the pressure of chasing extraordinary profits.
4. Focus on what you can control
Do what you can to prepare for market downturns so you’re less likely to panic when they happen.
This can include choosing investments that fit your risk tolerance, properly diversifying your portfolio, and setting the right asset allocation for your needs and situation.
