We may not realize it, but many of us are letting our emotions and values play a role when we make investment decisions. And the impact can be significant. Are you an emotional investor? And if so, what can you do about it?
Here’s an example: This investor constantly trades his portfolio. Buying and holding seems boring, so he buys and sells on a whim. It feels fun, but there’s a downside: chances are he’ll likely lose money in the process.
Of course, the opposite is also true. Consider another investor who’s afraid of ending up poor. As a result, she refuses to take even a sensible risk with her portfolio. In the end, she does end up poor, because her investments don’t keep up with inflation.
To avoid emotional investing, it’s important to know your investor persona: What do you really want from your investments? And why do you invest as you do?
For example, many investors tend to hold on too long to a loser. In this case, the underlying emotion may well be pride: Buying a security is a hopeful beginning, and few of us want to admit we’ve made a mistake. So we convince ourselves the investment will make a comeback. But it seldom does.
In the final analysis it’s likely that emotional investing will reduce your profits. Avoid this trap: have a solid financial plan and stick to it. Your advisor can work with you to develop a plan – and help you stay with it.