You lie awake, palms sweating, wondering to yourself why that investment seemed so promising. The ‘what if’s’ tumble through your mind like one of those falling dreams that jolt you awake; as you chastise yourself, vowing to change your investing habits.
Sound familiar? To many vow to change their investing habits too often when things don’t pan out the way they expected. What many investors don’t realize is that this is emotional investing.
Some may argue that emotional investing doesn’t exist, that it’s justification for what was originally a poor investment decision. But emotional investing plagues many, even tenured investors.
It becomes important to recognize the ‘signs’ and potentials in order to prevent becoming an emotional investor yourself. Or perhaps you have already experienced emotional investing, so how can you do better next time?
Top investment options are stock market trading, investing in start-up companies, and life insurance. All come with a measure of emotional output, some less than others.
But having an investment plan and knowing what to invest in, (whether it be the stock market or private companies, and regardless of how you emotionally handle it) are first steps to becoming and remaining a logical investor.
Emotional Investing: How Does that Even Happen?
Anytime something that matters to you, i.e. loved ones, possessions, your money, is involved, it’s nearly impossible to remove all emotions. Emotions defined is, “a state of feeling that results in physical and psychological changes that influence our behavior”.
Therefore, our everyday actions truly are governed by emotion, and especially when it comes to major decisions, such as deciding to invest.
According to Bedel Financial Consulting, there are four phases in the emotional cycle of an investor.
A kin to the cycle of an addict, there are highs and lows, excitement and euphoria at the ‘first hit’ when one initially decides to invest in the next “sure thing”
When bad news comes or economic paradigms shift, inevitable anxiety and fear sets in as the investor ‘withdrawals’ from the investment high. If anxiety continues, then desperation may set in, and the investor desperate for relief, either vows to never invest again, or is emotionally charged to impulsively invest again to feel that ‘high’ felt when they first invested.
When news changes for the better, suddenly the cycle begins again, and despite the fear and anxiety felt before, and vows to “change investing habits”, the investor ends up doing it all over again.
What initiates the desire to even invest and ride such a roller coaster of emotions? Simply put, people invest to make more money (cashcowcouple.com).
“The more emotional the event, the less sensible people are” (Dr. Daniel Kahneman). What you choose to invest in and why become two of the most important factors. Knowing the ‘what’ and ‘why’ from a logical standpoint is what can mitigate the potential to invest emotionally.
What to Invest in Logically, Even if it’s Still Emotional
Simply piggybacking on the success of someone else’s investment is not enough to ensure success. Because should they be wrong, or their investment not prove successful, how it affects you will differ from how it will affect an affluent investor’s bottom line.
Being well educated on the stock, asset, or company you want to invest in becomes the first step to a logical rather than an emotional investment.
The best way to logically invest is to invest into something that can’t be affected by outer influence such as the economy or majority.
The stock market in general is plagued with uncertainty and is fueled by factors beyond an individual’s control. When faced with uncertainty, people tend to make decisions based on their emotions, subjective experiences, not on logic or objective reality.
Therefore, investing in the stock market will be emotional, even if you fully educate yourself before you invest. The same can be said of investing in companies, unless you are the one in full control of the company’s success, your investment will be subject to the ups and downs the company presents.
Why Investing with Whole Life is Logical Rather than Emotional
Life Insurance, most specifically, Whole Life Insurance on the other hand is perhaps the most logical of investments, despite the emotional connotation that ‘life insurance’ stipulates.
As a Whole Life policy is not in any way controlled by outside forces, such as the economy or the stock market (whole life insurance is owned by a private mutual insurance company) there won’t be any sleepless nights or anxious waiting for your investment to collapse.
A Whole Life policy comes with cash value that you can have access to when you need it and for anything.
Unlike stock investments where your returns are subject to when you decide to cash in, if there is anything left once you do. And unlike investing in a company, where you have to wait to see if the company becomes profitable before you see any returns.
You are investing in something that will grow your personal economy in the present while preparing financially for your future.
Whatever you opt to invest in, avoid emotional investing by building an investment strategy that keeps you focused on long-term goals, rather than short-term returns.
Q: How do emotions like fear and greed influence investment decisions, as mentioned in the article?
A: Emotions like fear can lead to hesitation and a reluctance to invest, while greed can result in impulsive and risky investment choices. Both emotions can cloud rational decision-making.
Q: What strategies can individuals employ to make more rational investment decisions and overcome emotional biases?
A: Strategies may include setting clear investment goals, diversifying portfolios, conducting research, seeking professional advice, and practicing disciplined investment strategies to reduce the impact of emotions.
Q: Why is it essential for investors to be aware of the emotional aspects of investing and how they can affect financial outcomes?
A: Being aware of emotional biases in investing helps individuals make more informed and rational decisions, reduce the risk of impulsive actions, and improve the long-term success of their investment strategies.