As an investor, several factors go into making a financial decision. Given the volatile nature of markets, it is essential to make financial choices only after careful consideration. All investments should be made only after thorough research and professional advice. But sometimes, emotions can trump logic while investing, and this is seldom a good idea.
Reasons for emotional investment
The primary goal of investments is to preserve capital while earning profits. Thus, market movement of any kind is bound to cause panic or euphoria among investors. This can affect rational thinking and lead to emotional investments.
For instance, the desire for quick returns and fear of losing capital can lead investors to make impulsive decisions. Fear caused by news and trade reports also often leads to emotional decisions. When emotions drive investments, investors underestimate risks or overestimate returns, making ill-informed decisions.
Besides market movements, unverified sources and rumours can also give way to emotional investing, leading to huge losses. A wise investment approach is maintaining a diversified portfolio that offers balanced returns in all market conditions.
Strategies to avoid emotional investing
Here are some ways to avoid emotional investing:
Financial plan: It is essential to create a comprehensive financial plan before investing. This involves clearly understanding your current financial position, long-term and short-term financial goals, and your preferred investment intervals. A well-designed plan that leaves room for market fluctuations will stop you from making rash emotional investments.
Dollar-cost averaging: This financial strategy involves investing equal sums at regular intervals. These intervals are determined in advance, and investments are made irrespective of the market condition. This helps mitigate the impact of market volatility. If the mutual fund price is higher one month, you will buy fewer shares, but if the price is lower, you will buy more shares. Over time, this can help to smooth out the impact of price fluctuations on your overall investment.
Diversification: The concept of diversification is revered in the investing space, and for a good reason. It involves investing in different securities instead of sticking to one. This approach helps to reduce the probability of emotional investing and lowers the risk levels. This is because markets barely ever move simultaneously. Thus, profits from some investments cover the losses in others.
Take breaks: While it is important to monitor your investments, it is also important to step back at times. After a prolonged period of good returns or wrong choices, take a break and re-assess your financial position. This can prevent you from being overly focused on short-term market movements and making decisions based on your emotions.
Expert advice: It is always helpful to have guidance from a financial advisor or professional who is aware of the trappings of the market. A qualified financial advisor can act as an excellent sounding board for your investment queries and will help you base your investments on current market trends, historical data, and future prospects, and not depend solely on emotions and intuition.
Emotional investing can be detrimental to your investment corpus and divert you from your financial goals. The best way to keep emotions out of investing is to stay calm irrespective of the market situation. Make an investment plan and adhere to the broad strategy. Remember – always act on research and not your impulse.