We can all relate to the feeling of being in love - the sun is shining, flowers are blooming even in winter, your heart is skipping a beat, and euphoria is at its peak. But what happens when you take off the rose-tinted glasses? If you’re lucky, the world is still a beautiful place. But, usually, it’s best to see the true picture first.
An investor's first emotional dilemma
You buy something. Soon, its price starts to rise, instantly making you feel like an investment genius. Your hope of becoming a millionaire is growing stronger and stronger. Logically, you increase your bet. It’s been working for you so far, so why not. The hype is slowly but surely taking control of you. Soon, you find yourself risking way too much. And things change. As they always do. Then panic sets in. You suddenly realise that your emotions drove you to the other side. The side you swore you would never step into.
“What in the world happened?” you might ask.
Well, you were taken by your emotions. Every investor is exposed to this trap. Risking too much. Riding the wave of exhilaration and letting your emotions fly high. It’s a common psychological phenomenon - you surround yourself with information that matches your beliefs. You magically see what you want to see (remember those rose-tinted glasses?). And you’re not ready to admit you’ve made a mistake. You even take comfort in the four most dangerous words in investing: “This time it’s different.” Denial is a powerful force.
Why are emotions so tricky?
As with everything we do, emotions, be they positive or negative, influence our (financial) decisions. Even when it comes to investing, it’s good to be aware of when and how emotions can play tricks on the mind. A friendly piece of advice - know when smart money is buying and selling.
How do you overcome emotions?
In a time of euphoria, you should find the power to sell. Sure, doing that is counterintuitive as all the signs are pointing in the other (yet wrong) direction. But remember, when even your grandparents start recommending the same investments you’ve made, it’s usually time to sell. Ask yourself this: if everyone has already bought this investment, where will future buyers come from to drive the price up?
The same is true for a market downturn: when the last believer is gone and the market is full of despair, you should find the courage to buy. It’s a time when everyone has already sold their investment, and with no more sellers, the price has likely hit bottom.
Of course, this is easier said than done. In moments like this, you need a strict plan. With no emotions. Or, if you’re not disciplined enough, you can trust experts who have already navigated their way through such cycles and know full well how to recognize and control their emotions. Knowing you’re in good hands, you may then breathe a sigh of relief.
Did you know that it is wise to spread your investments in various asset classes, to reduce the investment risk? Learn more.