Top Tips To Reduce The Emotional Costs of Investing
If you think through your past investment activities, you may notice that some of your more significant mistakes have been related to emotions. For example, the market took a downturn, and you sold stocks when it was better to ride through the storm. This type of loss can be considered to be an emotional cost of investing. It may be one of the more significant investing costs that you could face, and these tips can help you to reduce the impact of emotions on your decision-making processes. Create a Plan: Many people make investments with the decision to simply see how much money that they can make from them. However, with all investments that you make, you need to have an up-front plan regarding when to sell. Determine what profit you expect to make from the investment, and stick to your plan. Of course, you should sell when there is a fundamental reason to do so. For example, cut your losses if the company is about to go bankrupt. Otherwise, be prepared to weather the storm. Focus on Your Goals: You may be a short-term investor looking for a quick gain, or you may have a long-term hold position in mind. Remember that long-term investing means that your investments will have high and low periods. Before you sell during a downturn, ask yourself if this decision will help you to reach your goals. When you always make decisions with your goals in mind, you will let your goals guide your decisions rather than your emotions.
Have an Emergency Savings Account: Some investors make emotional decisions that result in financial loss because they are afraid of losing a considerable amount of money that they may need access to within the next few months. In a sense, they do not have the financial means to withstand a serious downturn. One way that you can combat this type of emotional decision-making is to establish and fund an emergency savings account. You certainly do not want more money than necessary sitting in an account with a low rate of return. However, this is preferred over the possibility of taking huge losses related to emotional decisions. Therefore, plan to have at least nine to 12-months of your expenses saved in an emergency savings account. Understand the Investing Experience: Some very low-risk investments will increase in value at a slow rate without ever decreasing in value. However, when you want to see major gains, you can reasonably expect to deal with more risk and greater fluctuations. This is a part of the investment experience that many investors understand initially. However, they are ill-prepared to actually deal with the effects of losses. When you focus on this understanding and when you understand that markets eventually rebound if you wait long enough, you can avoid unnecessary losses. Financial losses from investing can be staggering at times, and they often are unnecessary. Many losses are the result of emotional decision-making. Apply these tips to your activities to avoid this type of loss.
Mark Angelo co-founded the Investment Manager in August 2009 and two affiliated investment managers.