Just recently, Philippine stocks declined after the US and China imposed tariffs on billions of dollars worth of imports. I’m sure when the news broke out that the PH market is on a downtrend, many investors got caught up in media hype and started to panic.
From my experience with the financial markets, investors have this habit of pumping in money into investments at the top and selling at the bottom. They can easily get carried away and decide to buy or sell at the peaks and valleys of the market cycle.
When something big happens, such as the election, company controversies, spats with foreign governments, or any other news that may distract investors and promote a highly emotional environment, you can expect volatility in the markets.
However, as an investor, the key to wise investment decisions is learning how to forget your biases and manage your emotions amid the market chaos. In this article, I will explain why emotional investing occurs and provide some tips on how to avoid or overcome this.
How Emotions Interfere with Investment Decisions
When investors make drastic investment decisions based on their emotions or how they feel about the current market performance rather than how the market will perform in the future, the result will most likely not be a good one. Sure, you are just human; however, when you allow fear or greed to take control, you put yourself at risk of committing investment errors.
For instance, when there is a market correction and the market tumbles by, let’s say, 10 percent, those who can’t manage their emotions effectively will definitely be consumed by panic and will start to sell because of fear that the market will further decline. However, corrections are just short-lived and there will soon be a market rebound. So in that instance, if you allowed your fear to impact your investment decision, you will lock in your losses.
Similar to fear, greed is another emotion which can mess up your portfolio when you let your decisions be guided by it. Let’s say you invested in a particular company but then you see that this other company is gaining better, if you choose to become greedy and you sold all your shares in the first company to invest in the latter so you can chase the higher gains, it can be the case that you are already late in the game and have missed out on the gains of that company.
Strategies to Avoid Letting Emotions Interfere
- Try to stay focused on your long-term goals for your portfolio.
No matter how difficult it is to keep your chill, always try to look at the bigger picture and focus on what will happen to your portfolio in the long-term.
- Repeat this mantra: Buy low, sell high.
This is probably one of the most common investment tips you will learn, but this requires you to set aside your emotions because it requires you to do the opposite of what the market is doing. When the market is at a high, investors will tend to enter the market. However, this should be the time for you to sell and then buy those which have underperformed.
- Focus on making consistent returns by diversifying.
I know it’s tempting to chase home runs, but this can result in overexposure or underexposure in certain sectors. By investing across different sectors in the market, you will be protected against market risks and make consistent gains.
- Don’t focus too much on what the media tells you.
The media can be overly dramatic and the exaggeration of these market news is one of the major factors that contribute to feelings of fear or greed. Instead of the news, hear out the insights of reliable financial advisors or other trusted sources.
- Hire a financial advisor that you can trust.
Look for a reliable financial advisor who will always put your best interest in mind. By doing this, you will be sure that you will be on the right track and be able to prevent your emotions from driving the direction of your portfolio.
- Assess the reason behind your investment decision.
Before you finalize your investment decision or a shift in your portfolio, just stop and think first—why am I exactly doing this. If it is because of a short-term market movement, it is highly likely that it is based on your emotions and that decision shouldn’t be executed. Meanwhile, if your decision is based on long-term outlook that is supported by data, then go ahead and do as you please.
Investing without letting your emotions interfere with your decision is easier said than done. However, one thing that you should keep in mind is that financial markets are far more resilient than how you perceive them to be.
Letting your emotions affect your decisions is a surefire way to incur losses or minimize your potential returns. By doing the strategies shared in this article, you will be able to keep an even keel and avoid investment traps.