In a perfect investing world, we’d all respond like robots. The markets go up, we’d know it’s time to sell. The markets go down, we wouldn’t have any problem buying.
But because we aren’t walking, talking algorithms, we’ll almost always need to take emotion into account. We’ll almost always need to weigh financial decisions by both the numbers and how we feel.
Seeing the emotion in our investing decisions may seem like a small thing. Learning to understand it though is huge for future goals.
For instance, think about the reasons you own the investments you own. I suspect more than a few of you have at least one investment, maybe more, that makes no sense. Unless you consider your emotional attachment to that investment.
Maybe it’s stock from an old employer. Maybe you bought Apple because you really love your iPhone. Whatever the investment you bought, you’re probably holding on to it for emotional reasons.
When you step back, you have a really hard time identifying how this individual investment fits into your bigger plan. But you can’t bring yourself to let it go — at least not yet.
We also need to understand how emotion can stop us from making smart decisions. We need to be aware that liking an investment a lot may not be enough to justify owning it. On top of that awareness, we need to remember how our strong emotions may lead us to make a mistake.
Pause for a minute and think through a big financial decision you made based mostly on emotion. Maybe it turned out great, but for sure you made more mistakes than you expected.
Think it through in two steps. Weigh how you feel about an investing or financial decision. Then, ask someone you trust, with no direct connection to the outcome, what they think.
If the person you trust suggests the opposite of what you want to do, take a deep breath and work through the reasons why. You may still end up doing exactly what you planned to do. But having this check-and-balance in place can help you see potential issues.
You are most definitely not a robot. That said, there’s no reason for emotion to stop us from making good financial decisions.