How are emotions and investments linked? Or should they?
The two are actually intricately linked in our financial lives.
Emotions define investments, and investments define emotions.
For example, most people who invest in stocks buy the next stock based on hot tips, be it from the last night party or the media channels doling out expert advice on stocks.
Or even the general euphoria about the economy and stock market makes us greedy and plunge into get-rich-quick behavior.
Thus an investment is made based on emotions for most people.
Now the same investments cause further emotions. The stock market is down, there is a trade war with China, the media is predicting a crash and so on.. We give in to the noise around us because we are now invested in the market, and it is our duty to become emotional with the world. Otherwise we are deemed too careless about the investments we made so emotionally.
Proven? – Emotions define investments, and investments define emotions.
However the above linkage can be controlled and severed at the right place to make it advantageous to long term investments.
There are only 3 steps to build a successful investment strategy.
- Take your emotions into account in planning your investments and portfolio. See which areas of your financial life needs more focus, be it retirement, kids education, emergency fund or long term wealth. This is where most of the emotions should be used (as every one has different life goals and situation), but this is planning only – not yet buying any investment product.
- Once you have decided what to invest in and how much, automate your plan. All banks and brokerage services provide automatic transfers and investments.
- Take rest of your emotions elsewhere. Just forget the investments as they build up. You just need to tweak it once a year. However this is where people pour in maximum emotions as the noise in the market and the economy rise and fall. Instead hold your investments for the long term as if the account is locked, and you forgot the password.
Note that after step 1, there is no more emotion.
Here are few previous posts on step 1.
Budget – Grow the tree upside-down
Investing in the High Five portfolio
For step 2, where you take action.
Emotions are used to our advantage to plan the portfolio and then automation and ignorance (to the market) is the bliss.
For step 3, the following quotes by Warren Buffet will help.
“If you cannot control your emotions, you cannot control your money”
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
