It is said that investing and trading has to be done with the head and not with the heart. What it means is that your investment decisions must be based on pure reasoning and logic and not on fits of emotions. Here are 10 ways that you can actually avoid emotional investing.
10 sure-shot ways to get rid of emotional investing
- Don’t get carried away by price ticks. Remember, ticks represent the very short term movement in stock prices. More often than not, these ticks represent the noise in the market. As an investor never get carried by these ticks. If you are an investor, taking a very short term approach can be counter-productive.
- Remember, history always tends to repeat itself. That is what technicals are all about. More so when someone comes and gives you that “This time it is different story”, you need to remember that history with respect to corrections and valuations have always trended to repeat. Since human psychology remains the same, these trends are very likely to repeat in the future too.
- In the long run the market is a weighing machine. In the short run, the market may behave like a slotting machine in a casino. But in the long run the markets and stocks will veer around to their intrinsic value. This mean reversion is inevitable and that is what you need to bet on as a long term investor.
- Don’t fall in love with your stocks. This is critical. It is very easy to fall in love with stocks especially if you have been holding the stock for a long time or if the stock has delivered returns over the last many years. Imagine if you had held on to Nokia with that thought process. When the tide turns, it is time for you to turn too.
- Herd mentality will not lead you anywhere. As an investor you need to talk to your broker, understand the logic behind an investment and then rely on your own evaluation and instincts. By following the herd, you will only end up losing money with the herd. In stock markets, the herd is normally wrong.
- When all analysis is done, go with your gut. Yes, you do reach a point where all the evaluation is done, the numbers are done and dusted and still you are unsure. At that point, just go with your gut feel. There is really no choice. More often than not, your gut takes you in the right direction. This may sound emotional, but actually it is rational!
- Ask questions and accept no axioms. There is nothing like a market axiom is current because a Warren Buffett says it or a Peter Lynch says it. It is your job as an investor to ask probing questions before committing money to an investment. Aggressive sales people will try to get your buy-in by quoting success stories. Leave that emotional high out of the picture and just focus on your core questions.
- Consult experts but don’t get carried away by their views. Experts are experts and that is all. At the end of the day, it is the investor who is committing the money to the stock. Experts must be consulted but there is no obligation on your part as an investor to listen to their ideas and implement the same. In fact, it is best that you use your own discretion and finally take a trade.
- Never make investment decisions when excited or frustrated. This is a point as old as the ancient Hindu scriptures and it still applies to your investment activity too. When you are excited or frustrated you are not in a normal frame of mind. Investment decisions made under these circumstances are never going to work for you. Leave out your emotions and if are in an emotionally volatile state then just avoid making serious investment decisions. Put it off for another day.
- Keep your asset allocation in perspective. This is the last but not the least important point when it comes to keeping your emotions out of investing. Your allocation to equities always has a perspective. If your financial plan calls upon you to allocate 50% to equities and if your equity allocation has gone up to 65% due to the bull market, just follow the dictates of your financial plan and rebalance.
