Emotions are a part of the human system and it’s almost impossible to discount one’s feelings when it comes to making financial decisions. It’s totally normal to feel a sense of excitement when your investments are doing great, or anxiety when they’re going the opposite direction.
What you want to avoid, however, is making illogical and irrational decisions led by the moment’s emotional outburst such as selling your stocks too soon, or putting too much of your money in one investment vehicle.
Understanding the emotional dynamics of investing really helps in putting things in the right perspective.
Here are three things every investor should keep in mind.
1. Don’t Overextend Yourself Financially
Investments — no matter how competently you handle them — poses risks. There is no surefire way to guarantee positive returns. It’s always a continuous learning process and there is always room for improvement (and error). Thus, you’ll have to prepare yourself financially and emotionally for your investment to produce one of these three results: profit, loss, or break-even.
Don’t overextend yourself financially to the point where you no longer have any room for mistakes. Remember, there are many factors to consider when it comes to investments like economic growth, interest rates, inflation, and a lot more. You cannot completely control its flow no matter how hard you try, so avoid putting yourself in a situation where it’ll be difficult to bounce back when things don’t go the way you want them to.
( See also: The Risks of Investing )
2. Identify Your Break-Even Point
Some people refer to the break-even point as the safe zone. It is, after all, the point where you get the cost of your investment back. Up to what point are you comfortable delaying this for a profit? Different investments have different break-even points and the higher the risk, the higher the rewards. Find the type of investment that suits you, and then once you’ve reached a break-even point for your investment of choice, you can diversify and put your money into other avenues.
(Tip: First Things First — Setup an Emergency Fund)
3. Create a Realistic Plan (and a Backup Plan)
Things don’t always go the way you want. This is a fact. When we’re talking about investments, this would mean you either lose money or you don’t gain enough. Creating a specific (and realistic) plan of action is necessary to help you figure out the steps you should take when you’re facing a certain situation — think of it as a flowchart marked with a variety of scenarios along with the corresponding viable actions you can take in response. Including a backup plan (and knowing when to jump into it) in case Plan A goes wrong may also help reduce the stress and prevent you from making bad choices.
(Tip: Learn About The Financial Planning Pyramid)
The emotional dynamics of investing, when not properly managed, can be stressful (and we all know how that’s bad for you). Avoid these situations by knowing what’s involved. That way, you will be able to keep a clear head and make the logical decision. Keep the three things above in mind for a more enjoyable and rewarding experience.
