Why you should remove emotion when investing

In an ideal world, we would make the right decision at every turn.

In the real world, however, our decisions are often clouded by emotion, which may or may not lead us to choose a potentially less favourable path.

When it comes to investing, emotion is generally best left out of the decision-making process.

Why? According to a study1 by Science magazine, people lose 13% of their IQ points and make rash decisions during times of financial stress, resulting in poorer decision-making.

For example, instead of buying low and selling high, in times of financial stress these investors are more likely to buy high when stocks are popular and prices are already soaring, and sell low as they panic during a market downturn.

Of course, emotional investing is not limited to stock market investment. When an investor buys an investment property because they love the property or the area, it can make them blind to the flaws – and the risk.

Instead of choosing an investment property with their heart, property investors tend to fair better using cold hard data. Similarly, intelligent investing in the stock market would mean removing emotion, to rely on information, and professional advice.

If you want to find out more about seeking the advice of a professional, check out our tips for choosing a financial adviser.

For most investors, smart investing means using their emotional intelligence rather than their emotions. It means putting their emotions on hold and investing with logic. Wondering how you can ensure you’re applying this logic to your investment decision making?

What is emotional investing?

When we are emotional, we rarely think clearly. When we fall in love, do we see our partner’s flaws? When we get angry, do we appreciate the other person’s point of view. It’s usually only when that initial hit of emotion has dissipated that we can start thinking with our head, instead of our heart.

When it comes to investing, it can be all too easy to get caught up in the emotional side. If the market takes a downturn, you may panic and want to sell to minimise your losses. However, had you stuck with it, it could have in fact recovered over time.

Similarly, if every man and his dog is buying a particular stock or asset, you may get caught up in the excitement and want to invest too. However, all that interest has likely driven up the price, so you may be buying near the peak, limiting the amount you could potentially gain.

Emotional investing can also encourage you to hold on to investments long after you should have offloaded them. Perhaps you’re ashamed of making an investment, and you hope one day it will ‘come good’.

Maybe, you have an emotional attachment to an investment, which stops you from selling, even though it would be financially smart to do so.

How to take emotions out of investing

No matter what you hold in your portfolio, whether it’s stock, property, cash, or a little of everything, you may benefit from taking your emotions out of the equation. So, how do you do that?

  • Don’t love your investments: Whether the investment is a certain stock or an investment property, keep it at a distance. This can help you avoid buying the wrong investment, or holding on to it when you really should sell.
  • Take time and ask questions: Avoid getting swept up in the moment by taking your time to think about and understand your investment decision. Take time to not only deliberate but also learn as much as you can about your options, write down the pros and cons, and don’t let yourself be pressured into making a decision. Asking yourself questions, such as how it will help your financial goals, and what would happen if your investment doubled – or collapsed.
  • Try Zero Based Thinking: Consider what would happen if you had to sell your entire portfolio – taking it back to zero. Would you buy back each investment? If not, you may consider letting those investments go.
  • Consider dollar-cost averaging: This is a strategy where a certain dollar amount is invested at regular, predetermined intervals. So, during a downward trend, investors are purchasing shares at cheaper prices, and during an upward trend, the shares previously held in the portfolio are producing capital gains and fewer shares are being added at the higher price.
  • Diversify: Having a diversified portfolio can reduce the need for an emotional response when times get tough. Giving investors confidence that their portfolio will ride out market ups and downs, this can offer a way to avoid the dangers of putting all their eggs in one basket.
  • Utilise the services of an expert: If you’re struggling to keep your emotions in check, you may want to consider letting a professional take charge. Managed investments, similar to Trilogy’s monthly income trust, enhanced cash or property trusts are handled by Trilogy’s team of experts, allowing you to have a more hands-off approach while benefitting from their skills and experience. However, when it comes to make an investment decision, if in doubt, you should always seek professional advice from a licensed financial adviser.

Interested in learning what else you should think about before buying a property? Check out what to consider before making a property investment

[1] http://science.sciencemag.org/content/341/6149/976

The material on this website is intended only to provide a summary and general overview on matters of interest.  Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.

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