Emotions and Investing

masksToday’s post will be about emotions and how you should put them aside when making investment decisions. Investment is about numbers, percentages, ratios and other, factual  things. There should be no place for emotions here. At the same time we continuously meet with emotional impacts that can affect our investment decisions. They can come from many sources: analyst up- or downgrades,  the new super investing opportunity we hear from our neighbor, headlines of financial news, or the result of the presidential elections. These impacts can make you buy or sell assets, while such decisions should not be based on them.  Let’s demonstrate this with an example:

You’re invited to play a game (watch out, it involves some gambling element:) ).  There’s a box with 200 pictures of different people. 60% of them have a criminal record, the rest don’t.  You need to pick pictures from the box one by one and you need to tell whether the person on the picture has a criminal record or not.  Every time you need to bet 1 euro and if you guessed right, you double your bet, otherwise you lose it.

The tactic you should follow is pretty simple:  you should always bet on that the person on the picture has a criminal record. By this, you’re guaranteed to win at the end of the game, even if in 40% of the cases you lose your bet.

Now let’s say you pick the following picture:

Or this one:

They look nice people, right? Would you change your bet…? Many people would get overruled by their emotion and make a decision that doesn’t make sense based on the pure numbers. By making such decisions, they are actually reducing their chances to win in this game.

The above analogy can be very true for the stock market, especially if you do index investing. History proves that besides of financial crises, world wars, natural disasters, the stock market is only going up on a long term.  Still, many people can lose fortunes on emotion based investment decisions.

The best thing you can do is to do your own research, make your long term investment strategy and stick to it. This is exactly what I’ve also done in the series of Searching for the Perfect Portfolio.  You can find those articles here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Summary

I recommend doing the same for yourself; better if you write it down so you can always look it up in the future. Does it contain things like “Depending on when does the FED/ECB raises the interest rate or depending on who will be the next president of the USA, I’ll do this or that”?  If no, then all these events are nothing more than a noise for you. Stick to your plan!

I wish successful and emotion free investment to all of you out there!

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