How to Avoid Emotional Investing
Investing can be a complicated process. There are many different factors to consider from the current market conditions to an investor's individual risk tolerance. One of the most challenging aspects of investing, however, can be managing one's emotions. Emotions like fear, greed, and envy can all come into play, leading investors to make rash decisions that ultimately harm their portfolios. In this article, we’ll discuss how one can take steps to help avoid emotional investing and instead make rational investment decisions that hopefully lead to long-term financial success.
#1: Create an Investing Plan
To avoid emotional investing, it can be helpful to have a well-defined investing plan to follow. This plan typically details one’s financial goals, risk tolerance, and the types of investments they plan to make. By creating a solid investment plan, one can usually avoid the temptation to make impulse buying decisions based on market fluctuations. Instead, they can refer to their plan, make calculated decisions, and hopefully stay on track toward achieving their financial goals.
#2: Stick to the Plan
Having a plan is one thing; sticking to it is another. Investors commonly make emotional decisions when they deviate from their investing plan. This can happen, for example, when an investor tries to time the market or chase high returns. While there may be short-term gains, deviating from one’s plan can expose an individual to more risk than they may be comfortable with, leading to bad investment decisions.
#3: Diversify One’s Portfolio
Diversification can be an effective investing strategy. By helping to spread out one’s investments across different asset classes, industries, and geographies, it can potentially minimize risk exposure. Diversification can make it easier to avoid emotional decision-making because it prevents one from being too heavily invested in any particular sector of the stock market. Instead, diversification allows individuals to take a long-term view of their portfolio's performance, encouraging them to make more rational investment decisions.
It is important to note, however, that while diversification may help reduce one’s risk of investment losses, it cannot eliminate the risk entirely.
#4: Ignore the News
Financial news is often sensationalized, designed to capture one’s attention and keep them watching. It's important to, in general, take such news with a grain of salt and be careful not to let it impact one’s overall investment strategy. Instead, it’s usually advisable to read the news for information purposes only and avoid making impulsive decisions based on what one hears or sees in the media.
#5: Work with a Financial Advisor
It's important to note that avoiding emotional investing is easier said than done. Working with a financial advisor can usually make it easier for one to take a more balanced approach to investing, helping to eliminate emotions from the equation. A financial advisor can typically help investors stay focused on their investment goals, in addition to helping them develop comprehensive investment plans, which can increase the odds they make good investment decisions, even amid market volatility.
Like it or not, emotions tend to play a significant role in investing for many, but unfortunately, they can have a negative impact on achieving long-term investment goals. However, by taking a more calculated approach to investing, one can usually stay the course and make well-informed investment decisions. By following some or all of the steps mentioned above, it may be possible to approach the market more objectively without emotions clouding one’s judgment as much.