How to Avoid Emotional Investing?

Emotional investing is dangerous, given the vagaries in the most unpredictable mood swings of the stock market.

Your investments, as they say, are your best friends. They may also turn out to be your worst enemies. This is more so for stock market investors who let their hearts rule their heads. In other words, emotional investing is dangerous, given the vagaries in the most unpredictable mood swings of the stock market. Emotion-fueled actions like buying stocks at a premium and selling them at lower prices do not make a wise investor. Similarly, clinging on to particular stocks for sentimental reasons is bound to negatively affect portfolio performance.

The following ways may be remembered to avoid emotional investing:

Don’t Run After Returns Only: Don’t over-react when the stock market starts moving. Think before you leap. Even though news of the market crashing unsettles us very much, taking rash decisions and offloading all your stock could lead to huge financial losses. It is always prudent to remind yourself that any investment plan or stock in which you put your money must work long term and should be linked to your retirement objectives. A day’s market fluctuations is no determinant of drastic buying or selling. So investing in stocks when the market streaks upwards or dumping them post a downturn won’t benefit you in any way.

Be realistic:  If your tolerance is low risk and your portfolio includes stable and well known companies with steady past performances and which guarantee long-term growth, your returns, in all probability, will not be fantastic at least in one calendar year. Remember, the more risky your portfolio is, the more it will fluctuate. Most investors desire the best benefits without taking any risk. This is definitely unrealistic. Your diverse and long-term plan that has been created with your final goals in mind shall help you in setting realistic and practical expectations in the future.

The Stock Market Is No Playground: Some dare devil investors take the stock market as a challenge which they want to overcome at any cost. They take it like a game where the stock market, as an opponent, has to be beaten no matter what. It’s truly a myth that investing constantly in the market gets you better returns. It certainly isn’t wise to make investments and then let complacence set in, expecting that the same investment will get you the best returns every year. So invest smarter instead of playing the typical buying and selling game which you most probably won’t win.

Long-term Plans Are Essential: Emotional investing usually takes over when long-term plans do not exist. Any long-term plan needs to be customized in order to meet some specific goals that you may have. When you don’t have a long term plan, you are actually like a ship without sails and don’t have a definite course to chart. You are actually veering off track and this could lead to some very disastrous consequences. Investment choices vary from person to person depending on age, income potential and your long term needs. You could make investments for buying a house in future, your children’s education and marriage, medical needs etc.

Take Professional Help: For newcomers to the stock market, it is always advisable to consult professional financial advisors who are experienced, knowledgeable and more importantly, reliable. Take advice from friends and associates who have used their services and then select one to guide you through the motions, at least initially.  It could be a worthwhile investment for the fees that you would be paying him and his advice, if correct, will always work to your benefit in the long run. However, you have to choose carefully after taking his overall goodwill, experience and knowledge into consideration. Rest assured, selecting the wrong advisor will inevitably work to your detriment.

Always remember that it’s your hard earned money that is at stake. And protected it must be at any cost.  When the going is good, offload all stocks that have appreciated your capital without allowing sentiment to rule your moves. As Warren Buffet once said, “Don’t we discard garments that have outlived their use?” The same applies to stocks also.