Investing is the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. Investing can also include the amount of time you put into the study of a prospective company, especially since time is money. But the hardest part about investing could be how not to sabotage yourself.
In the entire process of investing, emotions play a very crucial role in determining the success or failure of a portfolio. Human beings are emotional, easily influenced and often tend to let emotions get the better of them. But, when it comes to investing, that might just be one of the biggest mistakes we make.
When we think about emotions related to the market, fear and greed would be the two that rule the market. However, if there’s one thing certain about the market, then it is that the market is always irrational.
It is important to realize that some investments need to be let go at the right time and it is important to focus on the bigger picture; further plans and goals. Too often, we see the company we have invested in doing very well and making us money by selling off impressive products and gaining larger market share. We then tend to get attracted to the company and would rather not let go of it because of its perceived stellar performance.
But, one should remember that the sole purpose of investing in a company is to make money and not let our emotions get the better of us. If anything changes, it is time to objectively reassess your investments and even consider selling the stock.
These are the 7 types of emotions that can be major killers in making successful investing decisions:
There are people who admire the portfolio of others. On the other hand, envy can put your investments at a major risk. Jealous of fellow investors’ boons, individuals often attempt to duplicate the results with little success.
Unfortunately, one person’s strategy doesn’t always fit another’s life circumstances or monetary constraints thus being one of the key reasons why envy can be a major successful investment killer.
“Studying a fellow investor’s success is smart. Trying to copy and outdo him out of jealousy nine times out of 10 will get you nowhere,”
– Justin Kirk, an acquisition and investment associate and former portfolio analyst.
A single emotion that is enough to kill successful investing even before it starts. Fear plays a huge role in emotional investing and it is probably the most detrimental emotion. If there is one thing we know about the market, it is that we cannot get returns without taking risk and the fear of taking risk is something that kills successful investing.
Just as being too fearful can jeopardize your investment success, being overly hopeful is problematic. Hope can turn negative when it inflates expectations. Whether you’re a brand-new investor or one with years of experience, being too optimistic can lead you to take on too much risk with the idea of scoring a big payout.
Furthermore, people who are too hopeful often experience something called recency bias, in which they assume that what has happened recently will continue to occur in the future. It is good to be optimistic, but having misplaced hope — or inflated expectations — can spell disaster for your portfolio.
Believing in yourself is one thing, but stubbornness rarely pays off in the world of investing. In fact, stubbornness often inspires investors to purchase a stock that isn’t ideal or stay with a stock that has already shown signs of dropping.
“Part of the problem people have with giving up hope is that they’d have to admit they were wrong,” said Kirk. “If the investor were to sell it at a loss, they’re admitting they made a bad decision. Worse, a bad financial decision. Admitting this is very tough for people. In reality, often it’s best to cut your losses and move on.”
Most of us want to become stock market success stories. However, if you let the pride of previous investment wins go to your head, it might cause you to make poor decisions moving forward. A string of wins doesn’t make you a stock market savant. In fact, believing you can time and game the market is the kind of hubris that destroys portfolios.
Pride is something that can lead to holding onto a tanking investment just because one may be too proud to admit that they’re wrong.
“Anger can cause you to think irrationally and put your ego above wise investment decisions,”
– Michael Weisz, founder and president of YieldStreet.
Anger can sometimes push you to make unhealthy investment decisions. And in a bid to recover losses as a result of the bad decision, you may commit a series of investment errors.
Depression plays a profound role in emotional investing because people tend to remember their failures more than their successes. According to Barclays, depression usually sets in just after an investor’s stock bottoms out and can give rise to loss aversion. While depressed investors might feel like they’re protecting their pocketbooks, in reality they are often allowing great opportunities to pass them by.
It’s important to remember that, when you play the market, your wins are often bigger than your losses.
These are just a few important emotions that are the major killers for successful investing. Emotions, in general, should be kept away from investment decisions even if they’re a part of the company or a reason for investing in the company.
The main and sole purpose of investing is to maximise returns, and one should remember it is important to have a strategy – think about how your portfolio or assets are performing, and make your decisions based on these factors rather than emotions.
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