It can be hard to keep calm and carry on when you invest, especially if your journey has had a lot of ups and downs. However, getting carried away by your emotions isn’t good, especially if they end up influencing your decisions.
Experts avoid emotional investing by accepting the fact that we are all susceptible to emotional investing.
One important trick traders use is sticking to a system like clockwork and by being as rational as possible to increase their chances of a favorable investing experience. But how exactly do you do that?
Do your homework
Emotional investing is an easy trap to fall into when you aren’t really sure of what you’re doing or what’s going on – and simply because it’s human nature to be emotional especially if it involves our dreams and aspirations in life.
That’s why you should always take the time to learn about investing and how investment vehicles work (or at least the ones that you’re thinking of putting money into). When you have that basic understanding, you’re less likely to panic if value goes down and probably won’t get too excited when conditions seem to be right for a spike in prices.
Of course, it won’t make you an expert overnight, but the knowledge will help put things into perspective so you can see the bigger picture.
Consider the risks first
If your money is exposed to more risk than you’re actually comfortable with, it can be easy to end up doing emotional investing.
If you really can’t afford to risk losing your money or if the possibility of your investment’s value dropping fills you with anxiety, there’s a strong chance that you could end up making decisions that may not be right if the market dips or crashes.
To avoid this, put your money only in investments that match your risk profile. That way, you’ll be ready for the amount of risk that comes your way – then take it from there.
Make a routine
When you don’t have a plan and so you make investing decisions on the fly, the chances are that you’ll end up being swayed by what you’re feeling.
To avoid emotional investing, you could find the right strategy for you, create a plan based on it, and stick to that plan. Together, these allow you to set a sort of “investment routine.”
Routines don’t sound particularly exciting, but that happens to be the good thing about it. After all, the less decisions you need to make, the less likely that you’ll be affected by your emotions.
One thing that you can include in your investing routine is peso-cost averaging. In this, you place a set amount of money in a new or existing investment at regular intervals, like every month or every 2 weeks.
If your plan has certain milestones, like switching your portfolio to different investments by a certain date, you should continue to do these too.
Prepare ahead (or, “Plan your trade and trade your plan.”)
From the state of the various markets to the performance of individual assets, investing has a lot of potential for the unexpected to happen. If you aren’t ready to deal with it, you could end up making emotional decisions.
That’s why you should make contingency plans for such occasions. By preparing ahead, you won’t yet be feeling the emotions that you would when they actually happen, and so your decisions are more likely to be based on reason.
Of course, you can’t really anticipate everything, and so something could happen which you don’t have a plan for. In that case, you’ll need to be a little flexible in determining the right response (but avoid having your emotions dictate what you should do).
Think of your goal
When the fear and uncertainty (or the excitement and enthusiasm) are pushing you to make investing decisions without any real factual basis, remembering why you made that investment in the first place can help keep those emotions in check.
When you think of your goal and how important it is to you, you’re more likely to have control of your emotions. Then, you can start to analyze the information that you have so you can come up with the best rational decision you can make.
Talk to an expert
The fear or excitement that you could be feeling are absolutely normal, but the situation might not actually call for such emotions.
To get a proper perspective, you could try getting some solid advice or even just a calm explanation of what’s going on from an expert. Such people have years of experience with investing, and they’re probably gone through similar situations many times before.
This expert input may show you the bigger picture, which could then help you decide on the right way to react, or if you should even do anything at all.
It all depends on you
While doing some or all of these methods can help you avoid emotional investing, at the end of the day you’ll still need to exercise your awareness and self-control.
When you know that your emotions are leading you towards a certain decision, you’ll have to use your willpower to stop and examine your action before making it. This might be hard at the start, but it’s the best way to properly manage your portfolio.