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ECONOMY | 06.14.2024

The emotions that work against investors and how to keep them under control

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Investing in the financial market isn’t just a question of numbers and strategies. Emotions have an important role to play and can significantly affect an investor’s performance.

Fear, greed, impatience, euphoria, regret and overconfidence are just a few of the most common emotions that can lead to irrational and harmful decisions. With this in mind, it’s important for investors to learn how to identify them and, more importantly, how to keep them under control.

Fear

One of the most common emotions when it comes to investments is fear. This is a natural emotion that may arise at times of economic uncertainty or during market downturns. Investors acting out of fear tend to sell their assets in a panic, consolidating losses rather than waiting to recover them. This type of reaction means they are unable to make the most of purchase opportunities when asset valuations are low. 

How to keep fear under control:

  • Financial literacy: understanding market cycles and investment principles can alleviate fear.
  • Diversification: cultivating a diversified portfolio lowers risk and offers greater security during volatile periods.
  • Long-term planning: upholding a forward-thinking outlook and staying mindful of investment objectives helps overcome moments of panic.

Euphoria

On the opposite end of the scale to fear, we have euphoria. While the former paralyzes us, the latter sees us take rash and reckless decisions. Euphoria may arise in bull markets, when investors see the value of their assets quickly increase. As a result of this excess optimism, they may be tempted to purchase overvalued assets, in the belief that prices will continue to rise indefinitely. 

How to keep euphoria under control:

  • Objective assessment: conducting thorough and unbiased analyses prior to making investment decisions.
  • Moderation: exercising restraint by avoiding overinvestment in any single asset or sector, regardless of its apparent promise.
  • Consultation: seeking guidance from financial experts to attain a well-rounded perspective.

Greed

There's always the possibility that if you're too greedy, you'll end up with nothing. This is particularly true when it comes to investments. Greed can see investors take excessive risks in search of high returns. This behavior is common in bull markets, when expectations of continued profits cloud rational judgment. Greed can result in investments in overvalued assets or high-risk schemes that promise quick returns.

How to keep greed under control:

  • Regular reassessment: consistently reviewing the portfolio and objectives ensures investments remain aligned with the initial strategy.
  • Professional guidance: it is important once again to emphasize consulting with financial experts for impartial perspectives and to avoid impulsive decisions.

Impatience

Impatience is another emotion that can jeopardize an investor's success. Expecting quick returns can result in investors making frequent changes to their portfolio, incurring transaction costs and losing the advantages offered by long-term compound interest. Impatient investors are also likely to abandon effective investment strategies before they have time to bear fruit.

How to keep impatience under control:

  • Realistic goals: establishing realistic performance targets and reasonable timelines can effectively manage expectations.
  • Investment routine: embracing a consistent and systematic investment routine cultivates discipline and patience.

Regret

Regret can rear its head after making decisions that didn’t turn out as expected, leading to paralysis from overthinking or impulsive decisions to make up for losses.

How to keep regret under control:

  • Acceptance: recognizing that every investment involves risks and understanding that perfection is unattainable.
  • Learning: leveraging past experiences as lessons to refine future decision-making.
  • Strategy: upholding a clearly defined investment strategy and making adjustments only when necessary, rather than reacting to regrets.

    Overconfidence

    Generally speaking, humans tend to think that they know more than anybody else and that they aren’t going to make the same mistakes. Overconfidence can result in investors overestimating their ability and underestimating risks. This can result in a lack of diversification and decisions based on guesswork rather than solid analysis.

    How to keep overconfidence under control:

    • Research: ground investment decisions in thorough research and tangible data analysis.
    • Feedback: solicit feedback from other investors or advisors to glean diverse perspectives.
    • Humility: recognize personal limitations and the inherent uncertainty within financial markets. Knowing how to ask for help and recruiting the services of a financial expert when necessary.

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