Separating your emotions from your investments can be a challenge for many investors. Making decisions for your portfolio based on impulse or emotions can be detrimental to your asset growth.
In today’s world, it is easier than ever to let your emotions get the best of you. With apps that allow you to buy and sell stocks with the flick of a thumb, the process of emotional investing can be easier than ever.
Many younger investors follow social media channels, such as Tiktok or Reddit, that can influence individuals to buy or sell a certain stock. These impulsive decisions can lead to less-than-desirable outcomes as it is more-so gambling than it is investing.
Some may see a dip in a stock they purchased and quickly panic and sell off the stock for a lower price. This goes against the principle concept of buying low and selling high. They are, in turn, selling the stock for a loss due to their emotions, which can then turn to regret when the stock goes back up within the following days. It is very difficult to time the market or predict a stock price. This is why letting your investments grow the traditional way (long term- compound interest) will always be a better strategy.
One way to avoid letting emotions take control of your investment decisions is limiting how often you check your portfolio. This may seem counterintuitive but checking your portfolio every day (or multiple times a day) can lead to emotionally charged investment decisions.
The market will always have peaks and valleys— some days you will be up, some days down. Those who check every day may become hyper-fixated on the daily amount and focused on the short-term gains versus the big picture. You may be asking, “How often should I be checking my portfolio?” Well, we recommend asking yourself a few questions to determine if it is time to reassess your investment portfolio:
- Have Your Goals Changed?
- Has Your Financial Situation Changed?
- Has Nothing Changed?
If nothing has changed, it is okay to not make any changes to your portfolio. You should not feel like you need to constantly make updates.
Another way to avoid letting emotions take over is by doing your own research. By using only research and facts to make decisions, you are choosing logic over emotions.
Conduct research by looking at a stock’s price history to predict how it will move and its average rate of return. If you are investing in individual companies, it is smart to look at that company’s financials and how healthy their balance sheet is.
What is their debt-to-income ratio? How much cash do they keep on hand? Are they filing bankruptcy, going through employee lay-offs, etc? There are a lot of factors that can affect the stock price.
By conducting your own research, you can make informed investment decisions and avoid making the mistake of Return Chasing. The video below shows how chasing the return can actually hinder your portfolio performance.
Avoid trying to replicate other investors’ portfolio returns by purchasing the stocks that provided those returns. It is not guaranteed that a stock that performed well last year will do so again this year. You also want to avoid bringing biases into your investments, such as Recency Bias, Hindsight Bias, and Herding.
Artesys recommends keeping a diversified portfolio. Individuals have different goals and risk tolerances based on many different factors. By diversifying your assets you can mitigate risks to optimize your return profile. This can be done in a few different ways based on your investment preferences.
If you are invested in only stocks, you can diversify by looking at different industries, company size, different ratios, etc. This can also mean splitting your portfolio between cash, stocks, bonds, real estate, and so on.
Using diversification as an investment approach can help deter emotional investing because you will have a more stable portfolio that is not heavily affected by swings in the market.
For example, imagine you are only invested in tech stocks because that’s what your co-worker does (and brags about his returns). Then, if the tech industry nose-dives, you may be tempted to make an emotionally charged decision to sell off all of your stocks for a loss.
This is where the importance of diversification comes in. If one industry or asset is not doing so well, it will not affect the total portfolio as much.
If you find yourself guilty of letting your emotions get the best of you, know you are not alone. The strongest human emotion is fear, and it can get in the way of self-control and lead to irrational decision-making.
The first step to fixing this issue is to come up with a game plan for your investments. Determine what your goals are and reach out to a trusted financial professional if you need help getting there.