Investment decisions that keep you awake at night are not the kind of investment choices you should be making. If your mind is constantly racing because you’re questioning an investment product you just bought into, or because you just heard some bad financial news that you think could affect you, you need to recognize that you’re heading down a dangerous, unhealthy path.
Emotional investing is unhealthy because you’re essentially trying to rationalize ideas and concepts that are inherently irrational, which causes you to lose sight of your strategic objectives and financial goals. Human beings are not computers; we respond to and are swayed by irrational ideas all the time, especially when they come loaded with intense emotion. Even savvy investors can be swayed by emotional investing. Let’s explore some key insights for how to guard against emotional investing and learn to invest with our heads only:
How to Stop Emotional Investing
- Don’t feed the initial euphoria: When we first put money into an investment product, we can expect to experience both highs and lows. It’s OK to celebrate when we reach a high point, but the danger is that the elation we feel can cause us to fall into the trap that gambling addicts fall into every day: we want to feed the initial euphoria by trying to achieve the “first hit” feeling again. Unfortunately, this leads us to make highly irrational investment decisions that are devoid of strategy and objective.
- Don’t get swept up in market panic: Markets react to investors because investors react to markets. It’s a vicious, fast-paced cycle that is easy to get sucked into, even though it allows pure emotion to drive investment decisions. When investors are feeling confident, they drive up prices. When investors panic, they sell. You don’t want to be in a position where you’re beholden to the hourly whims of how others are feeling. Remember the old adage: Slow and steady wins the race. You should seek to ignore all of the frenetic distractions on the sidelines.
- Pull back: Investors who are driven by their emotions tend to believe that when they find a “good” investment product, they should just keep putting more and more of their money in this investment vehicle. This, of course, flies in the face of logic, as a core tenet of investing is to diversify your risk, not put all of your eggs into one basket. The key to combatting this innate human tendency is to proactively pull back from the investment products we’re most drawn to and most want to continue to invest in emotionally.
- Set clear objectives and goals beforehand: Once you become involved financially in any investment product, it’s tough to completely take your emotions out of the investment equation. Before you move into a new investment, you want to set clear goals and objectives for what you want to achieve, as well as clear strategies you will use (and won’t use) to achieve those goals. The more clearly defined you can make your plan beforehand, the less room there’ll be to deviate from that plan as your emotions try to get the best of you.
- Look for alternatives to the Wall Street frenzy: Because mass emotion is so closely intertwined with Wall Street, you’re much better off seeking out ways to avoid it entirely. For example, you could get into real estate, collectibles, or commodities – these can all be fun, lucrative opportunities that are less emotionally draining than Wall Street. You also should consider whole life insurance, an investment product that provides a steady, secure return on investment while simultaneously offering you the ability to access the policy’s cash value to fund other investments. A diverse strategy like this truly exudes the spirit of logic and rationale.
As much as we may be drawn to letting our emotions take over our investment decisions, we also can work just as hard to combat these tendencies. The keys to avoiding emotional investing are to not feed the euphoria of an initial investment high, to not get swept up in market panic, to pull back on the investments we’re most comfortable with, to set clear financial objectives upfront, and to seek out alternatives to the frenzy of Wall Street.
Are you ready to learn more about how to get away from the emotionally-fueled world of Wall Street?
At Paradigm Life we can customize a policy to fit your financial situation. Our expert Wealth Strategists are available to answer your questions and show you customized illustrations, outlining an individual plan of action to help you achieve your goals.