Have you ever sold a stock that you own because you are afraid of losing money? Or did you panic over unfavourable news regarding a company you invested in?
If you sold your stocks without making careful calculations and that it pains you to lose a penny, you may just be an emotional investor.
Emotions and gut feelings can be detrimental to our long term investments and portfolio.
Why does this happen?
Human beings are easily influenced by 2 main emotions, namely greed and fear.
When dot-com stocks were doubling and tripling during year 1998 to 2000. Investors with greed simply doesn’t care about the price to earnings ratio.
They just want to make a fortune out of this stocks in a short period of time. They were blinded by the short term gain to invest in those dubious hot stocks.
Investor who are always fearful of loss always make irrational decisions because this fear empower their logical thought.
Fear is an emotional response induced by threat. When a stock dipped by 10 percent, logical investors know that a stock does not keep going in an upward trend, he or she will take this opportunity to add in to their position.
Fearful investors feel a sense of threat, and will sell their positions right away upon noticing that the stock has become bearish.
What they do not know may be that bullish stocks trend upward in an up-and-down manner.
How can we prevent such instances from happening? Here are 3 tips you can follow:
1) Don’t Follow The Herd
If you ever get investment information from online financial news, media, co-workers, friends or even family and invest based on their stories.
Stop doing it because listening and following others based on their information can keep us from making logical investment decision.
Read up on the company financial statements, company future prospect and take calculated risk before you buy or sell a stock.
2) Spread Your Risk
Since volatility of market affects an investor decision. Dollar Cost Averaging is a strategy that prevents you from making irrational investment decisions.
It reduces the impact of volatility by dividing the total sum you want to invest into equal amount at regular interval.
Imagine you had a $1200 investment, you split it into 12 weeks. Each week, you will invest $100.
Using this method, you can purchase the shares at lower prices when there’s a downward trend.
You’ll enjoy capital gain during an upward trend for shares previously held.
You can buy fewer shares when prices are high.
3) Control Your Losses
Many people are deeply fearful of losing what they gained or losing above a certain percentage of their money.
To deal with such emotions, you can be a disciplined investor by applying trailing stops and limit orders.
This can help to trigger buy and sell transactions on your behalf which helps to relieve your decision making from any emotional influences.
Calm and rational investors base their investment decisions on practical and calculated information whereas emotional investors base their investment decision on their emotions.
In order to be a calm and rational investor, your investment decision needs to be kept clear of any emotional trigger.
Don’t follow the herd, spread your risk and control your losses. These 3 strategies are proven ways that help eliminate any emotional response towards investing.
Have you overcome your emotional investing habits? Share with us how you did it!