Retirement Guys: Avoid emotional investingWritten by Nolan Baker Mark Clair | | firstname.lastname@example.org
Making money in the stock market is simple right? Buy low and sell high. If we were wired like a computer the decision would be a clear choice. But since we’re human and God has gifted us with a wide range of emotions, we, unlike computers, must forge through our emotions when it comes to making difficult decisions. Our emotions can bring us great joy in our life; however, when it comes to buying and selling stocks they can often become our biggest problem.
Those emotions can cause an investor to buy or hold when it might not be the right logically decision. We can get too greedy when the market is at, or close to, a critical high. Our overwhelming emotions can also cause an investor to panic and sell when prices decline when sometimes the best decision is to stay right where we are. This “tornado”-like cycle can repeat itself over and over creating a financial nightmare for the average investor.
Want to land safely out of this decision cycle? Get educated! Investors who take steps to learn about the impacts of emotions in investing may make a more clear-cut response the next time they are faced with buying or selling stocks. We recommend learning about the following two steps:
1. Herding is when a group of investors move in the same direction together. This emotion has affected investors even before the days of the stock market. One good example was the tulip bulb craze in the 1600s. At the height of the buying frenzy, one bulb was valued at a sum that “could keep a hard-working laborer and his family in food, clothes, and lodging for six years!” (http://www.thetulipomania.com/). Then the black plaque made buyers stay away and prices plummeted.
More recently we saw herding in technology stocks in the early 2000s, the real estate bubble, and what we call the recent gold rush. We all know what happened to that herd. At the height of the bubble it all seems to make sense. That is when the average investor can get into trouble.
Remember, buy low and sell high. Be careful to avoid the urge to buy high in hopes of the price going even higher. Avoid going with the herd. Instead have a specific purpose for making the purchase, such as increased cash flow, and a reason to sell, such as risk reduction or to pay off debts to free up future cash flow.
2. Availability basis can also be a reason that investors can make an emotional decision. The best example I, Nolan, can give you is my oldest son Andrew doesn’t like to swim in the ocean. The reason is because he has a fear of sharks. The reality as I have told him is he is more likely to get hurt from a deer than a shark. In fact, he knows the odds are 1 in 11.5 million of getting attacked by a shark. Yet, because of TV shows like “Shark Week” on The Discovery Channel, the rational part of his mind knows that it is safe but his emotions get in the way. I must admit, he probably gets this from me; although I love the ocean, every time a fish or stick touches my leg my heart starts racing.
How availability basis might hurt the average investor is watching too much investment news then always second-guessing their investment decisions and buying and selling too often. Avoid the urge to make short-term investment decisions and to look at your investment account on a daily basis. Stay educated and informed about the investment plan. Understand and learn the investment processes that are being used to work towards achieving the ultimate financial goal. Try and stick with the plan even when the headlines in the news test your emotions.
The solution is if an investor can understand and acknowledge that emotions will always be part of investing, the better in my opinion the investor can avoid the urge to be an emotional investor and make mistakes. We recommend people think of their investments like their car. Have a set maintenance schedule to keep everything running top-notch. Be proactive to avoid problems. If the check engine light goes off, get in to see a trusted professional to get a diagnosis. The rest of the time, sit back and enjoy the ride.
For more information about The Retirement Guys, tune in every Saturday at 1 PM on 1370 WSPD or visit www.retirementguysnetwork.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. 419-842-0550
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