I chuckled as I opened the blank sheet to start writing this article. Not because the article topic is funny but because there seems to be an endless topic to write about when it comes to investing.
And I know why that is. Investing is mixed with human nature. And human nature is deep, plus, one cannot finish exploring it. I often like to say, the art of investing is best at revealing our true nature. That is because we can make money from it and we can lose money as well. We can also make that money in the twinkling of an eye and lose it in a very short time frame as well. That is our nemesis. Well, we aren’t exploring that phenomenon here.
If you give the remote of your life to someone who makes decisions emotionally, you are simply one click away from doom.
If you give your design to an engineer who makes emotional decisions, it is only a matter of time before the building or product collapsed.
If you give your money to an emotional money manager, be sure to make losses in huge amounts. Yes, because in a matter of time he/she will buy an asset and with a simple trigger they are out of the investment again for a loss or a quick gain (leaving much more on the table).
If what drives your investment decisions are emotions instead of knowledge and deep conviction, you are investing emotionally. You log in on Twitter you see your favourite person talking about some investment and you rush to make a similar investment. You will soon rush out just as you rushed in. Other times, it’s about making an obvious gamble just because a stock or crypto asset is trending, you go ahead and invest in it. Not sustainable as well and it often almost ends in tears.
Lyn Alden, founder of Lyn Alden Investment Strategy gave a decisive guide about how to deal with emotional investment. She said,
“If you’re emotional about an investment, your position size might be too big or too small for your financial goals. If you panic and fret every time one of your investments declines, your position size might be too big.
If you constantly check the price of something you don’t own and get mad that it goes up, maybe you should own some.”
In addition to her point is that if you are emotional about an investment, it might be that you don’t understand the value of the company you are invested in. This brings the points mentioned so far to 3.
- You invested too much than you should
- You didn’t invest at all or enough
- You don’t understand what you are invested in.
These 3 points are the principal reasons why we make emotional investments.
Because your position is too large, you are worried about the drawdowns. Even though the upside is equally huge, a drawdown is too much for you to handle.
Because you invested so little, even a 100% increase didn’t make much impact on your balance and so you are worried and triggered to do funny things. Or because you have not invested in that asset at all, you are worried that you are missing out on a potential upside. You should just take a small position in that.
The real fix is to define your game in the market and play it. One of the first things that we teach at the Wealth From Group Up private group (send a message here to join) is helping people know themselves as an investor and form an investment strategy that fits that. They can update when they like but as long as they embrace an identity, they should stick to what’s best for the identity. It’s been helpful for them so far.
Emotional investment is not good for you. It will cost you economically but also emotionally and both costs have a ripple effect.
Define your game as an investor and stick to baring all noise.