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Emotions are human and investing decisions are never black and white. Understanding your emotions as an investor can increase your chances of success.
If you had to assign a gender to the task of investing, most people would assign it to a man. You look at any financial media, and it is made for men. A quick search for top investing personalities will yield lists of men like Warren Buffet, Jack Bogle, Carl Ichan.
As women, we implicitly buy into the myth that men are better investors or that investing is a man’s game. And that women are “too emotional” to invest. Research, however, suggests the opposite. Women actually make better investors than men!
We’re less impulsive, less likely to try and compare our returns to our friends, and tend to stay away from trendy investments we don’t understand.
I am more of an investor than my husband. I love looking at different opportunities and understanding the interplay between the economy and markets. But, unfortunately, most households are not like ours. Investing often falls in the hands of men. In 2021, only 20% of couples are equal partners in investing.
Both women and men can fall into the trap of their emotions guiding their investing decisions. It should not be a reason for women to not make investing decisions.
Investors typically fall prey to two emotions – fear and greed.
Personally, I know I often act from a place of fear. I am more risk-averse than my husband and always fear making the wrong decision. This emotional awareness allows me to manage my emotions when making investment decisions.
5 ways to manage emotions in investing
Set up a plan
When you start investing, you start to understand your investing personality. We are all affected by biases, and they, in turn, can affect our decisions.
If you’re only invested in diversified ETFs or using robo-advisors, you likely don’t need an elaborate plan. Make sure to contribute to your investments periodically, whether it is every week, every month, or every quarter.
However, if you allocate a portion of your investments to stock picking, or speculative (higher-risk) investments, like cryptocurrency, small-cap stocks, or volatile stocks, then it is important to have an exit plan.
Consider the following questions: What is a good price to buy? What is your selling price? How much can you afford to lose?
Once you figure that out, you can automate and set up limits to reflect your plan. Online brokerages offer mechanisms like stop-limits, stop-loss triggers, to make sure your trades align with your plans. This can help you avoid emotional decisions on such trades and prevent you from acting out of greed or fear.
Understand your risk profile and biases
Your risk profile is determined by how much risk you have the ability to take on (risk tolerance) as well as how much risk you’re willing to take on (risk appetite).
There are many factors like the amount of money you have, age, financial goals, and emotional biases that will affect your risk profile.
When making investments, it is important to consider your ability to take risks and your personal appetite for risks.
Emotional awareness can make you a better investor. Knowing whether you act out of fear, greed, or somewhere in between can help you keep your biases in check and force yourself to back up your decisions as rational and logical when investing.
Turn off the market chatter
The financial media reports on the day-to-day movements of equities and commodities. I advocate for anyone interested in the markets to listen to this chatter sometimes. You get invaluable insights and better understand the movements in the markets and your investments.
But the market chatter can be overwhelming! It’s hard to make sense of how these constant movements actually affect you.
In the week of me drafting this post, the markets have had the worst week in months over the last five days – but over the last 6 months, the S&P 500 has risen 14% despite the “worst week.” The negative sentiment might have you believe that you need to sit out the markets. But in reality, you cannot predict the bottom of a cycle, nor can you move your investments in and out of the markets in an efficient way to avail of these potential opportunities.
Diversify
A popular strategy in investing is diversification. There is a lot of ways to diversify your investing portfolio. Diversification has proven to be a great way to escape the potential extreme downsides of investing. Another benefit is that it can provide an emotional buffer and prevent you from making impulse decisions related to your investments.
When you diversify, you reduce the risk that one investment can adversely affect your portfolio (aka concentration risk). A diversified portfolio can provide that emotional buffer you need to make rational decisions when investing.
One popular way to effectively diversify your investments is with the use of ETFs or exchange-traded funds. These popular, often low-cost investments are a great way to help you set up your investments and forget about them. They’re built to be diverse, and in many broad-based ETFs, you’re unlikely to see major spikes and lows, smoother returns, which means that you are unlikely to make rash decisions around them.
Stay in it for the long haul
Over the long term, the overall markets have gone up. There is no evidence that day traders make money. In fact, twice as many day traders lose money as make money. There is no evidence that trading in and out of the market can help increase returns. As an individual investor, you may have to pay transaction fees, or you might not be getting the best pricing from your brokerage.
It’s difficult to determine the bottom of the market or the peak. But, by staying in sound investments for the long haul, we take away the likelihood that we act from a place of fear or greed.
Final Thoughts
No investment has a 100% guarantee of success. There is always a risk attached to your investments, and this means that there will always be a chance that the outcome of your investment will not match the returns you thought you would get.
It is important to understand yourself as an investor and the environment you are investing in getting the best possible outcomes. The more you understand, the more you can control your emotions around investing.